Money and its Institutional Substitutes
Money & Macro3

Money and its Institutional Substitutes

This paper is also available on SSRN as a PDF.

Monetary theory has been concerned since Menger (1892) with the question, just what feature of the world makes money necessary? The answer depends crucially on what we take to be the relevant analytical alternative to monetary exchange.

In what we will call the Hicksian approach, the alternative is a frictionless general equilibrium (GE) economy, in which direct barter is sufficient to achieve a Pareto-optimal allocation of resources. The key difference of the real world – as Hicks (1935) made explicit – is the presence of frictions, or (in Coasean language) transaction costs. A great part of the subsequent literature is occupied with identifying the set of necessary and sufficient frictions that result in monetary exchange.

It must be emphasized, however, that the central question of the Hicksian approach – “What specific frictions distinguish the world from a GE model?” – is not the same as the question, “How did money in fact arise?”. This latter question we will identify with a “historical” approach. Rather than beginning with a frictionless model and introducing frictions to bump it out of a barter equilibrium, we may get a better sense of the function of and the relevant alternative(s) to monetary exchange by taking our starting point from its actual historical precursors.

Unfortunately the two approaches have not to this point been clearly distinguished and separated from other relevant questions. Without the benefit of a detailed history, Menger’s conjectural history of the evolution of monetary exchange out of barter has been taken both by friends and foes as an actual history.1 Similarly, without the benefit of a detailed theory, proponents of the historical approach are often derailed by historical accidents and elevate them as necessary conditions (cf. Salter & Luther 2014). For this reason the historical approach is often conflated with a “state money” paradigm (Goodhart 1998; Wray 2004), in which money gains currency and value from the diktat of some central authority.

This paper offers an alternative approach at the same time evolutionary and historical, unlike the evolutionary-but-ahistorical Mengerian approach and the historical-but-constructivist state money approach. It offers a taxonomy of exchange institutions as involving a tradeoff between fixed and marginal costs: up-front investment in increasingly higher fixed-cost exchange institutions lowers the marginal costs of exchange, resulting in increasing returns to the scale of the exchange network. Because increasing returns generally imply multiple equilibria, these fixed costs account for the persistence of more or less direct barter in more primitive societies (i.e. societies with a small scope of exchange), in contrast to the inevitability of monetary exchange that seems to be a feature of Menger’s story in “On the Origin of Money”. In turn, the level of investment in symbolic convergence that constitutes an exchange institution will determine the scope for the division of labor in a society. Monetary exchange is unique among exchange institutions primarily in having the lowest marginal costs. It allows, therefore, extremely wide scope for the division of labor. Compared to the deep and detailed study of political and administrative institutions, there has been surprisingly little comparative work on exchange institutions and economic growth.

The first section argues that the initial conditions of Hicksian models of monetary exchange have little validity in a world where the division of labor is limited by the extent of the market. The next two set up the theory, and the remaining sections identify the relevant fixed costs of money and its institutional substitutes across time. The paper concludes with some speculation on the future development of exchange institutions.

The Necessity of a Historical Approach

An exchange institution is a set of conventional practices that facilitates the exchange of goods and services. Monetary exchange in particular is an exchange institution where exchanges are facilitated by the common acceptance of one or several media of exchange – money – in terms of which the prices of other goods are quoted and rendered comparable with one another. Monetary exchange, this paper argues, involves a great number of complex practices that have become so routinized that they are frequently taken for granted.

The necessity of exchange institutions is often overlooked, however. Indeed, the self-evidence of exchange is very nearly a first principle in economics. Because it benefits both parties, it may seem not to require any particular explanation. Smith (1776, bk. 1, ch. 2, ¶1), for example, referred to the “propensity to truck, barter, and exchange” as a basic feature of human nature, and most economists have followed him in this assumption.

Nevertheless, the ability to truck, barter, and exchange runs into a number of impediments that are typically assumed away in Hicksian models of monetary exchange, where the institutional background is more or less invisible. In particular, non-trivial institutions will be required in order to make the assumptions of 1) preexisting specialization, and 2) straightforward property arrangements.

Of course, Hicksian models are motivated primarily by current monetary policy concerns, rather than by a concern for the historical emergence of monetary exchange. Two different frictions that both result in monetization in a GE context may have very different implications for the GE economy’s reaction to a monetary shock, for example. A model whose motion is amenable to expression in difference equations will tend to rely on the relatively strong and distinct equilibrating forces that characterize the financialized market economy to which they are intended to apply. The initial conditions of these models do not, therefore, correspond in any meaningful way to the conditions out of which monetary exchange in fact emerged. For this reason they should be interpreted as fundamentally synchronic rather than diachronic, despite their featuring “emergence” of money as an equilibrium result.

By contrast, the broader history of exchange is propelled by relatively weak or accidental selective forces, each of which cumulatively changes the problem context along a large and indefinite number of dimensions. Such motion quickly renders an analytical model unwieldy and insoluble.The increasing-returns model presented in this paper has no such neat result as the emergence of a single medium of exchange out of the interaction of optimal trading strategies. Instead, it sets up a broad framework to encompass heterogeneous transitions among various equilibria at a high level of abstraction, each of which is perhaps individually amenable to future analytical models, but which together are too multidimensional to be tractable using the simultaneous-equation techniques characteristic of the Hicksian tradition.2

Specialization Without Exchange

The assumption of pre-existing specialization can be seen plainly in search-theoretic models. Menger’s (1892) illustration3 is of a man who has produced some wares and now seeks to bring them to market in exchange for other items he desires, which suggests a barter society that has already achieved some degree of specialization in production. Kiyotaki & Wright (1993), likewise, postulate an exogenous parameter x ∈ [0,1] that “captures the [inverse of the] extent to which real commodities and tastes are differentiated.” This parameter also represents the probability of one agent desiring the good offered by another random agent. But because trade requires both agents to desire the good the other is offering, the probability of executing a successful trade with any given agent will be x2. The use of money, by contrast, raises the probability of a profitable exchange to x.

Nevertheless, as economists have recognized since the inception of the discipline, “the division of labor is limited by the extent of the market” (Smith 1776, bk. 1, ch. 3). In other words, specialization is endogenous to the size of the trading network. A sufficiently specialized society that somehow found itself without a medium of exchange would surely converge upon one. But because x is a decreasing function of the number of regularly traded goods, to the extent that arranging trades is costly, members of such a society will rarely find it worthwhile to specialize in the first place.

Unlike in search-theoretic models, therefore, a diachronic model of the emergence of monetary exchange must endogenize Kiyotaki & Wright’s x parameter and assign it an initial value of 1 – i.e. uniformity in tastes and production.4

Property Without Institutions

The assumption of familiar and well-enforced private property rules is also inapplicable to the conditions out of which monetary exchange developed. The centrality of this assumption to the Hicksian project can be seen even more clearly in the Walrasian class of models (Alchian 1977; Banerjee & Maskin 1996), which – in addition to preexisting specialization – also assume preexisting organized markets.

In the first place, if Smith’s dictum about the division of labor is valid, this is an even more heroic and question-begging assumption than that of preexisting specialization. In the presence of such frictions as characterize the real world, not least of which is travel time between markets, a commonly accepted medium of exchange is a prerequisite for organized markets, not the other way around.

More importantly, however, the “market” of this model depends on the limited behavioral repertoire of its agents. Specifically, the agents are only permitted to buy and sell. There is no possibility of theft. Though agents can be duped into making unfavorable exchanges, and no authority exists to enforce credit contracts, they are in general perfectly secure in their endowments. One may wonder, then, why the same implicit institution that supposedly causes Walrasian agents to respect property does not also cause them to respect contracts.

For the operation of actual markets, the range of “defecting” behavior is much larger than contract non-fulfillment. If the possibility of theft, expropriation, and the contestation of ownership are added to the model – if we drop the assumption of a basic respect for property – an organized market will not emerge so easily. Property, of course, is an exchange institution whose emergence we are concerned with here, involving both the accounting for those goods the control over which cannot be contested, as well as punishment of some sort for those who nevertheless contest that control (i.e. theft). For this reason, any exchange of goods that requires a property norm cannot be taken for granted in our initial conditions.

Atomistic Barter

Taken together, we may call the initial conditions of Hicksian models “atomistic barter”. Atomistic barter is characterized by simultaneous exchange of goods between more or less anonymous agents, whether through random meeting or in an organized market.

There is, of course, no evidence of any premonetary society using anything like atomistic barter as a primary exchange institution (Humphrey 1985).5 From the perspective of a modern market economy, a Walrasian situation without contracts or third-party enforcement, which rule out exchange on credit, might seem appropriately primeval to serve as the initial condition. However, the historical record suggests that incentive-compatible credit exchange was in fact the first problem to be solved in the chain of exchange institutions that led to monetary exchange, with property, specialization, and anonymous exchange coming much later. We turn, now, to this first step.

A Prehistory of the Division of Labor and the Extent of the Market

In light of these restrictions on our initial conditions, we begin with autarky – the size of the market being zero, and therefore without specialization. This will give us a sense of the basic impediments to the regularization of exchange that any exchange institution must solve. There is, of course, little doubt as to the historicity of autarky on a broad enough timescale: before primate sociality, there was solitary foraging (cf. Schutz et al., 2011).

Consider, then, the prospects of two identical and autarkic foragers (call them Crusoe and Friday) considering an exchange. We must suppose the first exchanges to happen under conditions of zero endowment, for the existence of individualized endowments presumes a preexisting property norm (i.e. uncontested control of goods), and the exchange of differentiated endowments further presumes preexisting specialization. For this reason, our prototype must be the reciprocal exchange of undifferentiated services. More specifically, services performed on the body of the other party – for example grooming, which must be performed sequentially – are a more likely prototype for the first exchanges than other services that might be performed contemporaneously, because the former are easier to monitor.6

Crusoe and Friday are, by hypothesis, both better off exchanging grooming. But both would also rather receive a grooming and then go swimming without returning the favor. On the other hand, conditional on not receiving a grooming, each party would rather avoid the hassle and just stay at the ocean. Despite the potential gains from trade, the equilibrium outcome is no exchange. The basic problem with getting trade started in the first place is that the time-separated quality of service exchange poses a prisoner’s dilemma and opens the door for defection.7 Without this first step, there is no opportunity for the development of specialization and the exchange of goods.

Monkeys groomingIn this more general sense, exchange is primarily impeded – not by search costs, since at this stage any individual is more or less as good as any other at performing an available service – but by a commitment problem. The pertinence of the dilemma can be seen even more readily in the animal kingdom, where the fitness costs of being suckered preclude most forms of cooperation and exchange.8 Even in this setting completely lacking in specialization, if Friday cannot commit to return the grooming, there is no exchange.

Dilemmas such as that faced by Crusoe and Friday are pervasive impediments to exchange and social organization (cf. Miller 1992). The distinctiveness of human social behavior is not, therefore, as is usually assumed, merely that man is able to appreciate gains from trade whereas animals are too dull to do so. Rather, humans are distinctive in their ability to commit on a non-rational basis to act contrary to their own narrow interest. It is not because humans are more rational than animals, but indeed because they are less rational in this narrow sense that they can be trusted, on the whole, to reciprocate cooperative behavior even at some cost to themselves.

A Taxonomy of Exchange Institutions

With autarky as the backdrop, the problem facing any exchange institution will be: how to overcome the prisoner’s dilemma of reciprocal altruism to make exchanges self-enforcing? There are factors that both help and hinder as we move toward a consideration of more familiar large-scale human interaction. Repeated play allows Crusoe to punish Friday if he defects. However, this equilibrium also becomes more and more difficult to monitor and sustain as Friday’s brothers, Wednesday and Thursday, arrive to the island. As Bowles & Gintis (2008) show, repeated play on its own is generally insufficient to sustain cooperation in groups larger than about four.

Cooperative exchange in a group larger than four individuals therefore requires an exchange institution, which consists of norms and strategies that facilitate:

  1. The accounting and publication of private information to identify defectors at low cost, and
  2. Convergence upon a coordinated strategy out of the infinite possibilities to punish defectors.

Much of the literature on early human development has focused on the punishment aspect, especially as used to suppress overt violence, and its historical trajectory toward more centralized administration. Comparatively little has focused on either the use of punishment in the context of exchange institutions (which may or may not overlap with the mechanisms and strategies used to punish overt violence), or the accounting and publication necessary to orient such punishment. Widespread free-riding is at least as deleterious to social cooperation as overt violence, but is generally punished in a different manner. We therefore focus the following taxonomy on these aspects.

The problem with cooperation in large groups is that the accounting necessary to prevent defection from becoming a dominant strategy requires increasing cognitive capacity as group size increases (Dunbar 1992, 1995). Humans do have an advantage here among animals: from their very emergence as a separate species, anatomically modern humans have been characterized by efficient facial recognition and a relatively large memory for keeping track of personal obligations. Still, impressive as it is compared to other primates, humans’ natural capacity for accounting obligations allows them to maintain group sizes averaging a few dozen, and maxing out around a few hundred.

However, humans do have another advantage: the ability to extend their cognition “outside the skull”, so to speak, by imbuing elements in their environment with symbolic significance (Clark & Chalmers 1998). Writing is the prototypical example: we can extend our effective memory by replacing huge quantities of information with a reference; i.e. with the knowledge of where to look. Similarly, investment in the capacity to offload the accounting of exchanges into the environment has the potential to vastly increase the information accounted for, and therefore also the scale and complexity of social organization.

We can use this idea of extended cognition to categorize exchange institutions in terms of fixed and marginal costs. In brief, the cognitive effort necessary to execute an exchange – the marginal cost of that exchange – may be economized by up-front “investment” in extended cognition strategies to facilitate the publication of trading histories in an objective form, or in other words by the establishment of an institution with a positive fixed cost.

This notion of a fixed-cost investment constituting an exchange institution differs somewhat from the orthodox notion of cost in the sense of not (in general) being the object of anyone’s deliberate choice. Nevertheless, it is a cost in an opportunity cost sense, and the usefulness of calling it an investment will become apparent. Taking biological and evolutionary costs as given,9 to effectively extend our cognition requires convergence on and socialization into certain norms, symbols, and meanings, which take time and effort that may otherwise have been devoted to more immediate concerns. To put it another way, any pattern of behavior can in principle be identified as having a joint basis in biology and culture. The cultural pattern may build upon, interact with, or even override biological patterns (cf. Hayek 1960, p. 93). In this sense, the greater the cultural basis of an institution, the more distant from any biological basis, and the greater the extent to which it conflicts with or overrides biological predilections, the more learning and habituation it will require, and therefore the higher its fixed cost.

The marginal cost of an exchange institution, on the other hand, is the cost of executing a particular exchange under it, including the risk of defection by the other party. Importantly, the marginal costs will be a diminishing function of the fixed costs, simply for the reason that costly but “functionless” practices will tend to be selected against, at least in the long run. On the accounting side, the more extensive the convergence on accounting strategies and symbols, the less cognitively costly it will tend to be on the margin. And on the punishment side, the more effective the punishment strategy, the lower the risk of defection. In both cases, lower marginal costs increase the potential scale of human organization. To anticipate the following sections somewhat, organizing exchange using only the natural cognitive faculties (what we will call “tribal credit”) involves a relatively high marginal cost for each relationship – say, 1/150 of the brain’s social memory. Thus, despite its low fixed cost, high marginal costs of maintaining ongoing relationships mean that tribal credit as a method of exchange and social organization exhausts cognitive limits at a very low scale. Monetary exchange, by contrast, involves a high fixed cost but extremely minimal marginal costs. Any given transaction requires relatively little thought to accomplish, and once completed, can be safely forgotten in a way that would destroy the self-enforcing quality of tribal credit exchange.

The formulation of exchange institutions in terms of fixed and marginal costs suggests an analogy to capital theory, and a sense in which institutions can legitimately be called “social capital”.10 Lachmann (1956) asks the same question of physical capital that we have just asked of institutions:

It will not pay to install an indivisible [i.e. high-fixed-cost] capital good unless there are enough complementary capital goods to justify it. Until the quantity of goods in transit has reached a certain size it does not pay to build a railway. A poor society therefore often uses costlier (at the margin) means of transport than a wealthy one. . . . [N]ew indivisibilities account for the increasing returns [to capital].

Similarly, even for a society on the brink of subsistence, investing in high-fixed-cost institutions is not “worth it” – i.e. is not an equilibrium outcome – until a sufficient volume of exchange has built up to amortize the cost. Tribal foraging societies, limited as they are in scale, simply cannot sustain enough exchange to make the fixed cost of monetary exchange – namely, a system of writing and mathematics, along with appropriately credible institutions – worth the cost to develop and sustain.

The analogy to capital theory is also appropriate in taking the form of a mutual feedback – in Lachmann’s example between investment in high-fixed-cost transportation capital and the demand for transport; in our case between investment in high-fixed-cost exchange institutions and the volume of exchange. This feedback is characteristic of increasing returns models with multiple equilibria, and makes it impossible to give either element strict causal priority. While the exchange institution limits the division of labor and the volume of exchange, so that investment in higher-fixed-cost exchange institutions makes possible increases in the volume of exchange, increases in the volume of exchange also make investment in higher-fixed-cost exchange institutions “worthwhile” (cf. Kaldor 1972). In this case the uniderectionality of both Say’s Law and it’s Keynesian opposite with respect to economic growth and the volume of exchange will be analytically inadequate.

The Tribal Credit Economy

The zero-fixed-cost case, relying entirely on the brain’s innate capacities for accounting and publication, will correspond to the earliest known form of social organization in cognitively modern humans, as well as the form characterizing the most primitive hunter-gatherer societies today. We will call this the “tribal credit” economy.

Tribal credit is the terminus of a more or less straightforward progression from autarky through dyadic and small-group cooperation as cognitive capacity increases. Most importantly, the time-separated quality of exchange is preserved through the whole chain, even as the exchange of fishing for gathering becomes reified into an exchange of fish for berries – hence the “credit” aspect (Wray 2004), ruled out by hypothesis in Hicksian models. As Wiessner (1977) notes, despite the nominally gratuitous character of the transfer of goods, the term “gift economy” is somewhat misleading: in reality, participants keep mental accounts of who owes how much to whom, and “woe to him who does not [eventually] make a corresponding present in exchange” (Simmel [1907] 1978, p. 95).11

The key institution that facilitates both accounting and punishment is the tribe, within which both functions are performed in a relatively decentralized manner. Regular interaction with a more or less definite group of people facilitates “gossip”, through which reputational information is regularly disseminated. Punishment, likewise – both of violence and of free-riding – consists of diffuse social pressure that escalates into ostracism. Each member has familiar knowledge of all or most other members,12 and the “trading history” of each member – unlike under atomistic barter – is more or less common knowledge.

With the regular publication of reputations and the collective exercise of social pressure on defectors, the tribe is actually able to harness the time-separated quality of early exchange to create mutual rents among tribe members sufficient to enable them to commit to cooperate with one another for the foreseeable future. In contrast, simultaneous exchange – by giving up the leverage of repeated play within a local structure – would make it relatively infeasible to punish defection.

Unfortunately, the marginal cost of exchange under tribal credit is extremely high, which places a hard limit on both group size and the division of labor. Because cooperation in a reputational game depends on knowledge of the identity and history of each potential trading partner, it breaks down when a sufficient number of players are anonymous. The scale of tribal credit organization is therefore limited by humans’ cognitive capacity for keeping track of relationships and obligations, thought to average around 150 relationships (Dunbar 1992, 1995). Indeed, tribal credit societies do not get far past 150 members before free riding and conflict become endemic, and such communities have regular institutions for cleaving once they get too large. It is an anthropological truism that tribes and villages will fission after reaching a few hundred people – about twice Dunbar’s number – in the absence of investment in higher-fixed-cost “integrative institutions” (cf. Bandy 2004; Chagnon [1968] 2009), more on which below. As a community approaches the size where any two individuals are as likely to know (i.e. to have ongoing mutual obligations with) each other as not, free-riding becomes the dominant strategy, conflict (or to use the anthropological literature’s somewhat more antiseptic term, “scalar stress”) rends it in two, and one half is forced to establish a camp elsewhere.

With the extent of the exchange network thus limited, the division of labor under tribal credit remains mostly ad hoc (cf. Hooper et al. 2015), with little capacity for permanent specialization beyond gender roles. There are simply not enough potential trading partners for it to be worth it for any of them to relinquish food production and to specialize in, say, pottery manufacture.

Such societies must form the starting point for a theory of monetary exchange. Unlike models of atomistic barter, where commitment is impossible and unlimited cognitive power allows for costless optimization, early human society is in fact characterized by robust institutions for long-term commitment, and extremely limited cognitive accounting capacity. Though there are no markets per se in a tribal credit society, even such a basic organization of in-kind multilateral exchange offers sufficient incentive for defection that institutions for accounting and punishment are necessary to make it work. Tribal institutions, by making exchange ongoing and personal, do indeed enable sufficient commitment to sustain cooperation at a scale of a few dozen to a few hundred individuals. As compared with Menger’s story, these credit relationships render in-kind and time-separated barter sufficiently tolerable to forestall the spontaneous development of indirect exchange.

Trading Networks

The problem in breaking out of the tribal credit equilibrium will be to expand the size of the exchange nexus to include anonymous others. The first step, historically, was the formation of inter-tribal trade networks, which allowed trade to take place on the basis of group affiliation rather than personal knowledge.13

There are two basic preconditions for the formation of trade networks. First, agents must be organized into groups within which some combination of internal and external forces suppresses defection. These mechanisms are analogous to prosocial preferences on the individual level. Leaving external enforcement to the side for the moment, our question will be: how can a tribe or village organize itself internally in order to credibly commit to forswear opportunism vis-a-vis other tribes or villages, and what forces lead it to do so? This is precisely the function of tribal institutions from the perspective of an outsider: they allow the group to act as a “superorganism” (Wilson & Gowdy 2015) and ensure its trustworthiness vis-a-vis outside groups.

Second, agents trading with the group must possess the cognitive faculty of hierarchical syntax, whereby groups of objects can be “chunked” and represented internally as a single object (Potts 2000, pp. 68, 116). This allows agents to respond to trustworthiness with trust, and in turn makes trustworthiness a worthwhile investment. Outside agents can use information about the reliability of the defection-suppressing mechanisms of a class or tribe as a substitute for personal knowledge. Marwick (2003) provides archaeological evidence that the development of inter-tribal trading networks indeed arose with the development of the language faculty. He argues,

The ability to express symbolic categorizations of social systems allows individuals to identify and interact with unrelated individuals in terms of symbolic categories rather than as unique individuals. This allows for relationships based on mutual rights and obligations rather than the histories of interpersonal relations that require renegotiation at each encounter.

Inter-group trade is the prototype of simultaneous exchange. Indeed, to demand repayment at the time of exchange is seen as a peculiar form of trade reserved for “outsiders”, and protects to some degree against defection in a situation where the two groups are not in regular enough contact to make something like tribal credit relationships feasible on an inter-group scale.14

To the extent that group affiliation can substitute for personal knowledge in the evaluation of trustworthiness, higher fixed-cost institutions can regularize ad hoc trading into permanent inter-group specialization, with the trading relationships between groups analogous to the relationships between individuals in the previous section.

Consider a society consisting of inland and coastal villages. Because the ecologies of the two village types are so distinct, the gains from trade are readily apparent: it pays to organize an ongoing division of labor between the coastal villages, which provide fish, and the inland villages, which provide vegetables. But even with simultaneous exchange, the two villages still face a problem similar to Crusoe and Friday: permanent specialization implies reliance on the other party, which allows it to “exploit” the other for better terms of trade (cf. Klein, Crawford, & Alchian 1978). In order to make specialization worth the cost, the village must be assured of a steady – or at least predictable – demand for its product. Even if the gains from trade are substantial, a society just embarking on the division of labor will have extremely limited means of smoothing consumption. For a risk-averse agent, an increase in the variance of his consumption is only worth it for a substantially higher mean (see the discussion in Wiessner 1977).

For this reason, inter-tribal trading networks tend to be richly laden with ceremonial significance. The ceremonial organization of exchange, by sanctifying certain arrangements and removing them from the set of negotiable terms, facilitates coordination and good will (Leeson & Suarez 2015). In other words, by restricting the scope of deliberation, the relevant choices take on the character of a coordination game – i.e. convergence upon the significance of the relevant ceremonial symbols – rather than a prisoner’s dilemma – i.e. the negotiation of terms afresh with every interaction (Bear, et al., 2017). Indeed, the more permanent and integral a particular trading relationship, the more elaborate the ceremony is likely to be (see, e.g., Malinowski 1926, ch. 3).

Ceremony and religion are examples par excellence of fixed costs of exchange institutions. It is not difficult to imagine forces driving investment in such institutions without anyone deliberately aiming at the result – as indeed we must, for an instrumental approach to such institutions would more than likely destroy any commitment power. If we assume some degree of random variation in exchange institutions, population pressure will select for higher fixed cost institutions (in this case, perhaps, the more ceremonially inclined), simply because a mismatch where the size of the society significantly outpaces the exchange institution will imperil that society’s continued survival. A society with numerous groups in close proximity must find a way to live peaceably with most of them most of the time, or face perpetual conflict and possibly extinction.15 In this sense, whatever other aspects it may have, any integrative institution that results in expanding the feasible social scale must necessarily be an exchange institution – i.e. it must involve symbolic convergence for the purposes of accounting and/or punishment.

As evidence for this account, a striking feature of contemporary natural credit societies without permanent trading networks is that they persist in areas with little to no space constraint.16 Environmental pressure, then – whether high birth rates or more intense competition for land – is a likely candidate for the kind of exogenous synoetic pressure that would push a society out of the natural credit equilibrium, and into either extinction or a higher fixed-cost exchange institution.

Managing Specialization

In a fairly small or sparsely populated society, the probability of failing to find trading partners willing to buy one’s wares in sufficient quantities to safeguard against starvation is high enough that investment in most specialized human capital is not worth the time. As the size of the trading network increases with the development of inter-group trade and groups are able to settle into permanent patterns of specialization, individuals are able to find productive ways to specialize in intra-group roles as well. Increased demand for particular products arises with specialization in production. The management of this incipient specialization is the problem of the exchange institutions in this section.

This section, then, describes investment in two different directions to manage specialization – namely, indirect exchange, which has the possibility of retaining a quasi-tribal structure, and customary accounting, which is largely a political innovation upon which economic structures can build. The later convergence of the two, with indirect exchange augmented by precise accounting, we will call monetary exchange.

Indirect Exchange

Indirect exchange in its basic form arises out of tribal institutions as trading networks become sufficiently regularized and village populations expand beyond the cognitive limits set by tribal credit. It is at this point that we can recognize a properly Mengerian convergence process: each trader’s desire to hold some stock of the most saleable good leads the group to converge spontaneously on a single medium (or a common set of media) of exchange. But note how far along the process is already by this point: specialization is very far from an analytical primitive!

The specific set of media – cowrie shells are a well-known example – tend to originate in the same ceremonial and religious context that previously coordinated inter-tribal trade. Armstrong (1924), for example, documented the situation on Rossel Island. Ceremonial offerings at life events such as marriages and property transfer had become regularized into routine economic transactions. The demand for these various offerings, then, gave rise to a set of twenty-two separate media of exchange arranged into a value hierarchy,17 with the use of higher-valued media still carrying a good deal of ceremonial significance.

This process of convergence on the significance of a medium (or media) of exchange is an important fixed cost, and a precondition for a great deal of further investment. Most importantly, the accounting by which humans organize the division of labor is now offloaded into a reified commodity which serves as a store of value – i.e. an indication of a positive account in the balance of reciprocal altruism (cf. Kocherlakota 1996). With the possibility of regular contact with “outsiders”, exchange practices are necessary that require less personal knowledge between individuals, although tribal credit remains important within an agent’s close circle. The investment of individuals in permanent specialization creates sufficient rents to bind them to their community and prevent defection as long-term tribal obligations decline in importance.

Customary Exchange

Indirect exchange does not necessarily entail accounting or calculation. Indeed, the history of these is bound up in a somewhat different exchange institution: customary exchange.

Where indirect exchange arose out of the routine expansion of tribal institutions, customary exchange became necessary as tribes turned to conquest. The origin of social stratification in tribal conquest is well-established; less obvious is the fact that social stratification was an institution for organizing the division of labor. This organization along the lines of social station within a geographic area and under some degree of central administration we will call customary exchange.18

A customary exchange economy is characterized by three important aspects of symbolic convergence:

  1. Formal law and specialization in the administration of punishment, which claims supernatural legitimacy through religion and ceremony. Compared to tribal ceremony, religion in a customary exchange society is more systematic and features powerful and moralistic gods rather than immanent and self-interested spirits, with whom interaction is mediated by a specialized priest or priestly class. A credible signal of belief in such gods – the more vengeful the better – serves to commit the community of believers to forswear opportunistic behavior with trading partners.19
  2. The administrative and merchant classes make extensive use of external calculation devices, of which writing is merely the most sophisticated, for their own internal accounting.20 This requires the development of an abstract numerical system. By contrast, tribal credit societies are characterized by languages with no precise numbers beyond one, two, three, many; and in at least one case no exact numbers at all (Everett 2005).
  3. Identity rules defining social stations are an important repository of accounting information in the wider population, which may still make extensive use of tribal credit within clan structures.

The institutions that support anonymous exchange within a given group are a straightforward development from those that support trading networks. The priestly class that formerly suppressed defection within one group now grows into the permanent bureaucracy characteristic of a proper legal system and suppresses defection in many groups. The groups themselves commingle, but rely on this external bureaucracy to punish the defection of other groups in order to maintain trustful relations with them.

Because the identity rules constituting these groups are the repository of information on the accounts necessary to sustain a division of labor for the great majority of people, they cannot be modified except at great cost; certainly not at the whim of any single individual in an occupation. The convergence upon their meaning is part of the institution’s fixed cost. As Leijonhufvud (1977) noted,

In largely non-monetary economies, important economic rights and obligations will be inseparable from particularized relationships of social status and political allegiance and will be in the same measure permanent, inalienable, and irrevocable.

Customary exchange, with its more centralized administration of punishment, entails dramatically lower marginal costs than tribal credit. For this reason it scales up far better as a method of social organization – well enough, at least, to manage a modest empire. Rather than exchanging with a particular person in the context of an ongoing relationship, a trader gains the ability to trade with a member of a permanent class of people who specialize in some production, without worrying about the personal history of his particular trading partner. In this way, because the delineation of its particular elements lies outside any single mind, the division of labor can reach far greater complexity than what was possible under tribal credit organization.

Monetary Exchange

Early customary exchange economies were characterized by more or less centralized administration of the distribution of goods and the division of labor. Like the accounting abilities of the individual brain in a tribal credit context, the calculative abilities of a central bureau run into inherent scale limits, for reasons later articulated in the context of modern attempts at such an institution (see Lavoie [1985] for a summary). We observe, therefore, a strong decentralizing tendency over time as early “centrally planned” customary exchange economies run up against the cognitive limits of a single administrative hierarchy, and as private entities begin to adopt accounting technologies (Hudson 2003a).21 Paradoxically, the decline in the intricacy of administrative technique between ancient Sumer and ancient Greece likely reflects an increase in the intricacy of the division of labor, as important exchange and production roles devolved to private parties.

The appearance of indirect exchange within a customary exchange society, whether from emergence or adoption, takes on a different character than in a tribal context due to the existence of a system of mathematics and accounting. Rather than fixed prices in value equivalency tables, the decentralization of exchange makes it possible and necessary to compare the values of an increasing variety of goods via a single unit of account and store of value – usually, in these early stages, a cow, a quantity of barley, or their metallic value equivalent (Ridgeway 1892). Calculation in terms of a unit of account embodied in a medium of indirect exchange, therefore, is an important hallmark of monetary exchange. Not only are there more profitable opportunities for specialization due to the larger pool of people to whom one can sell, but the diffusion of accounting and calculative technologies makes it possible to more precisely identify profitable opportunities for specialization, opportunities which could be seen only impressionistically in a tribal credit economy. And as specialization necessitates that more and more transactions be made on an outsider basis, without the benefit of ceremony, this diffusion also makes it possible to ensure against exploitation by numerically precise comparison of income and expenditure.

Market Prices and the Mass Money Economy

Customary exchange shades into monetary exchange over the course of vast expanses of time; indeed, more than a millennium elapses between the development of cuneiform writing and the first coinage. Monetary exchange is not, of course, a sufficient condition for economic development. Indeed, the kink in the “hockey stick” graph of world economic output does not come until after monetary exchange had already been in use, at least among the upper classes, for millennia.22

It is during this time that the first proper markets begin to appear, the organized meeting of strangers using a more or less standardized medium of exchange in terms of which the prices of goods are allowed to fluctuate. As cumulative institutional investments were made, the marginal costs of ad hoc monetary exchange (with flexible prices) fell below those of customary exchange (with customary prices) for increasingly broad swaths of people and categories of exchange. It is this extension of low-marginal-cost exchange to the masses that characterizes the mass money economy.

In order for ad hoc monetary exchange to displace customary exchange, the marginal cost of monetary exchange must be extremely low. This entails a great deal of investment in high-fixed-cost exchange institutions, both in terms of the money itself and the money users. For the money itself, there are a number of developments in minting technology that require a relatively advanced division of labor. Coinage itself was one such development, which (if reliable) allowed the counting rather than the weighing of metallic units.23 More recently the screw press, adopted in the 17th century in English and French mints, dramatically lowered the cost of coinage and increased the quality and standardization of coins. The reeded edge gave assurance that the coin had not been clipped or shaved, allowing exchanges to be conducted without high-marginal-cost haggling or verification. A coin whose quality must be haggled over is not a solid foundation for the explosion of ad hoc exchange.24

There were, in addition, important institutional developments, particularly in England, that contributed to low-marginal-cost exchange. The lack of small change was a frequent impediment to the money economy’s extension to the lower classes. Especially under a bimetallic standard, the silver coins in use for small change – already too valuable for many small transactions – would periodically vacate the country due to Gresham’s law, leaving only much more valuable gold coins. The issue of token coins, which solved the small change problem with some finality, required institutions sufficiently credible to forswear overissue (Redish 1990). The development of institutions for credibly restraining the administrative class from predation also enabled the development of liquid banking and finance institutions (North & Weingast 1989), which contributed to the stability of the value of the monetary unit (Harwick 2016) and (therefore) to the widespread use of reliable paper money.

More broadly, transportation and infrastructure were an important fixed cost in increasing the size of the market and thus the equilibrium level of investment in fixed-cost institutions. The emergence of flexible market prices doesn’t mean much in an isolated village; indeed, customary prices may be observationally equivalent to market prices. It is only when markets begin to become integrated across long distances – requiring prior investment in navigable roads and rivers between them – that market prices begin to play a crucial role in driving anonymous trade and the expansion of merchant classes (Nye 1991).

Finally, we should not take for granted the costs of learning, not to mention teaching an entire society, to count indefinitely high and to compare two arbitrarily large numbers (Deheane 1997). In conjunction with the availability of small change, the rise of mass education following the Protestant Reformation (Dittmar & Meisenzahl 2016), by raising literacy and basic numeracy, enabled large swaths of previously excluded people to participate in the money economy. This had the effect of dramatically expanding the size of the market, and thus the potential division of labor.

These cumulative investments in higher fixed-cost institutions, each of which lowered the marginal cost of exchange on various margins, took place over the course of hundreds of years in Western Europe. Once marginal costs are sufficiently low, and once the market reaches a sufficient size, to money’s initial embodiment of accounts is added the reification of global data on conditions of supply and demand as market prices in a common monetary unit, around which separate and anonymous (to each other) human actors can coordinate their plans impersonally at low marginal cost.

The emergence of market prices under mass monetary exchange reflects perhaps mankind’s most significant cognitive advance since the dawn of language (cf. Horwitz 1992), a distinction borne out by the phenomenal explosion in economic growth following the widespread integration of disparate markets first within England and Holland, and later much of Europe. As has long been recognized in economics,25 competitive prices make available vast quantities of information in summary form, and enable agents to coordinate their plans without being consciously aware of the circumstances to which they must adjust.

Market prices are crucial in the emergence of what North, Wallis, and Weingast’s (2009) (NWW hereafter) call the “open access order”.26

Limited access [i.e. customary exchange] prevents market prices from allocating resources between competing uses. . . . Rather than capturing rents by charging a high price, the possessor of a privilege may exploit it by charging a low price and allocating the resource to political allies. . . . When elites charge less than market clearing prices to secure political ends, the result is that prices cannot be used for impersonal coordination of the behavior of individuals. [Customary exchange] thus cripple[s] the price mechanism as a means to convey information about marginal benefits, marginal costs, and scarcity. . . . [I]t is not surprising that modern economic analysis of the price mechanism did not develop until open access orders with competitive markets began to develop. Competitive use of resources have existed since the dawn of human existence, but, with a few notable exceptions (such as ancient Greece), competitive markets with prices that convey information capable of coordinating human action are a recent development.

Having long ago substituted permanent specialization for ad hoc specialization with the adoption of customary exchange, the progressive substitution of ad hoc exchange relationships for customary relationships is equivalent with increasing social mobility. As Mitchell (1944) argues, echoing Simmel ([1907] 1978, ch. 4), the wide freedom in both consumption and occupation that we enjoy in the modern developed world is unthinkable without low-marginal-cost monetary exchange:

When money is introduced into the dealings of men, it enlarges their freedom. . . . As a society learns to use money confidently, it gradually abandons restrictions upon the places people shall live, the occupations they shall follow, the circles they shall serve, the prices they shall charge, and the goods they can buy.

The Future of Exchange

Interpreting the past is a simpler task than predicting the future. Nevertheless, in order to 1) demonstrate the usefulness of the framework “out of sample”, and 2) avoid the impression that monetary exchange in its current form represents “the end of history”, it will be worth imagining the shape of future investments in exchange institutions and advances in the division of labor.

Recall the two necessary constituents of an exchange institution: 1) accounting, and 2) punishment. It must first of all be remembered that relatively frictionless monetary exchange is still a rarity in much of the world. The lack of investment in institutions that can both credibly punish defectors and refrain from defecting themselves (Acemoglu 2003) inhibits the development of low-marginal-cost exchange institutions and technologies. Much of the future advancement must be in “catchup”, which will be – one must hope – an easier task than the first investments with the path already blazed by the Western world.

An Optimistic Scenario

That said, there is still much potential in the developed world as well. One important recent innovation with implications for both punishment and accounting is decentralized blockchain technology, especially with “smart contracts” and decentralized autonomous organizations (DAOs). These are all tools that direct and manage the ownership of records27 according to pre-specified rules, written in code and distributed across many different computers across the internet.

Obviously the widespread use of blockchain technology for payments and record-keeping requires a huge investment in the fixed costs of communications infrastructure and a staggeringly intricate division of labor to support the mass production of the computers necessary to use them. But having made this investment, the technology has the potential to address a major drawback that has beset the use of external tokens for accounting since their very emergence: the fact that external accounts can be manipulated.

Theft under natural credit is necessarily theft of specific items. With accounting kept track of by personal knowledge, there is no way to “forge” the accounts and receive more than one gives. The introduction of indirect exchange vastly increased the returns to theft: by stealing a cache of the medium of exchange, the thief could induce his none-the-wiser peers to render services of more value than he had rendered himself.

The political control of money beginning with customary exchange organization amplified the problem. While petty theft came to be more or less effectively punished by the new administrative class, the administrative class’ control of the accounting tokens gave it a large (though not infinite) latitude to accumulate resources to itself without contributing through exchange, or directly coercing. Devaluations, inflations, and extortion of financiers have been the norm throughout history. It is only with the relatively recent development of credibly restrained political institutions that fiat currencies – which enable the administrative class to manipulate the accounting system much more easily and extensively compared to full-bodied currencies – have become viable.

Each step along this path, toward lower-marginal-cost exchange institutions with accounting taking place more and more outside individual minds, has been accompanied by an increase in the losses due to account manipulation – whether through theft or political influence – and a concomitant increase in the resources spent to mitigate these losses. The very emergence of specialized administrators of punishment that marked the beginning of customary exchange was likely a response to the increased importance of theft following the increased use of indirect exchange. More than likely the majority of these tradeoffs have been “worth it” in the sense of resulting in a more advanced division of labor. But, assuming a diminishing marginal rate of substitution between convenience and trustworthiness, the most beneficial advances from our already high-convenience vantage point will likely be in the trustworthiness of the accounting system.

The emergence of blockchain technology, for the first time, holds forth the prospect of an increase in the reliability of the accounting system without a diminution in convenience, at least once handheld computers and smartphones are sufficiently ubiquitous. Because the protocols are administered by no individual or organization, no individual or organization has the capability to reverse transactions, forge accounts, or inflate the money supply unexpectedly. Such an advance in the trustworthiness of the accounting system, along with its convenience, has the potential to sustain advances in the division of labor far into the future, and far beyond the advances that would be exhausted under an accounting system subject to political manipulation.

A Pessimistic Scenario

On the other hand, lest this account be thought of as a Whig theory of exchange, the possibility of disinvestment in fixed-cost institutions must not be emphasized as well. Numerous examples in history show such disinvestment following a collapse in the size of the market (e.g. Humphrey 1985). Likewise, the increasing unreliability of the monetary unit at the collapse of the Roman Empire caused its money economy to fall into disuse and triggered a dramatic ruralization and spontaneous dioecism throughout Europe. Bloch’s description of the rise of feudalism (1966, p. 250f) can be understood in these terms:

Estate management requires careful account keeping, which became more and more difficult for average administrators, in the ignorance and disorder which the great distress of the opening Middle Ages brought with it. The repeated, and almost puerile, instructions which abound in the estate ordinances of the ninth century . . . show us how hard it was for the great men to make their subordinates apply the most elementary rules of book-keeping. To adopt tenancy as a solution was the line of least resistance. . . . [T]he new tone of social life and the new habits of mind were all against any effort to maintain the old, and far too complicated [i.e. high-fixed-cost], methods.

In other words, at some threshold market size between that of Roman cities and rural estates, and without a reliable monetary unit, specialization became a less attractive prospect. Enough people returned to subsistence agriculture that the whole process began to unravel, and Europe fell back for a time to the customary exchange equilibrium. Without specialization, there was little need for a medium of indirect exchange, without which there was little need for numeracy and accounting skills. As these began to atrophy, the monetary economy became more and more defunct until feudal organization was settled into as “the line of least resistance” – simple enough in its basic form to be conducted largely without the aid of arithmetic or money.28

One must hope that nothing so dramatic awaits the developed world today. Nevertheless, the dramatic slowdown in global trade over the past decade and the ballooning of unfunded obligations throughout the developed world over the past half century have the potential to trigger the “liquidation” of prior investment in exchange institutions, and especially in those more recent developments in institutions that credibly restrain political actors from manipulating their currencies too extensively in their own favor through debt monetization. Such a breakdown may necessitate, if not a return to feudal organization, at least a return to full-bodied currencies as a prophylactic against overly extensive manipulation.


Anthropologists studying natural credit societies are often impressed by the extent of the division of labor. Indeed, from a zoological perspective, the division of labor that can be sustained at essentially zero fixed institutional cost is one of humanity’s great distinctives. Its impressiveness stands out, however, because the whole complex can (and indeed must) be grasped in its entirety. The division of labor characterizing modern society, though orders of magnitude more intricate than that characterizing hunter-gatherer society, fails to impress us precisely because such intricacy does not have to be (and indeed cannot be) grasped in its entirety by a single mind. The accounting is dispersed throughout the environment through convergence on the meaning of money. When Hayek (1945) argues that “the ‘data’ from which the economic calculus starts are never for the whole society ‘given’ to a single mind which could work out the implications”, we might add that this is true only of those societies which have advanced beyond customary barter. Of course, for any society which today enjoys an appreciable level of development, customary barter lies quite a ways back.

Situated at the dawn of the era of widespread impersonal exchange, Adam Smith (1776, bk. 1, ch. 2, ¶1) observed mankind’s “propensity to truck and barter”, and tentatively suggested it as “one of those original principles in human nature”. Sociobiology supports this observation. Institutions for regular and predictable exchange are a hallmark of human behavior, endowed by a long process of biological evolution. This is no less true of the language faculty, which enables humans to offload cognition into the environment through coordination upon meaningful symbols.

It is no surprise, then, that the evolution of institutions for exchange, moving progressively more of the burdens of accounting and coordination out of the head and into the environment, is the primary driver of the advancement of human behavior and cognition in a span much faster than could be provided in evolutionary time. This paper has offered a unifying, though informal, account of this development through time in the context of an increasing returns model, and shown its fruitfulness in the analysis of important developments in the history of exchange. In this sense it represents a bridge between monetary theory and the state capacity literature, approaching the former in the context of developments in the latter. To return again to Smith, it is my hope – echoing Kaldor (1977) – that the notions of increasing returns and the division of labor being limited by the extent of the market should again become central in the explanation both of economic development and monetary exchange.


  1. Though more careful writers have given it a pure theory interpretation (e.g. Mises 1966, p. 408ff).
  2. It may, however, be more usefully illuminated using an agent-based simulation, which excels at modeling multidimensional evolutionary processes through time. This awaits future work.
  3. Though Menger antedates both Hicks and a full articulation of Arrow-Debreu general equilibrium by several decades, because his story centers on transaction costs, we locate him somewhat anachronistically in the Coasean tradition.
  4. See Gangotena (2016) for a formalization.
  5. However, Humphrey does document something like atomistic barter in post-monetary societies that have suffered a sufficiently catastrophic collapse in the volume of trade. Radford’s (1945) classic paper on a P.O.W. camp can also be viewed in this light: individual prisoners entered the camp more or less as strangers from monetary societies, and engaged in the direct barter of provisions until a sufficient volume of trade had built up to make the establishment of indirect exchange using cigarettes as currency worthwhile.
  6. The “time-dated goods” in Kiyotaki & Moore (2002; 2003) might be thought of as non-simultaneous services. Similarly, the “inside money” that arises in their model, as a claim to a specific time-dated good, is closer to pre-monetary credit (in the sense of time-separated barter) than to something like a demand deposit.
  7. The prisoner’s dilemma quality of exchange is what characterizes social behavior as opposed to herding behavior, where no incentive incompatibility need exist.
  8. On the various specific forms this fitness cost can take, and the concomitant margins along which social behavior can vary, see Wilson (1975, ch. 3).
  9. In principle, language acquisition will be costly in the same way; however, those costs are biologically obligatory and largely pre-conscious for humans (Hauser, Chomsky, & Fitch 2002). For this reason we reckon them as sunk costs rather than fixed costs, not subject to change on the timescale of institutional evolution. Beyond natural language, however, convergence on symbols and meaning – though piggybacking on the language faculty (Clark 2006) – typically does involve conscious effort and (thus) positive cost.
  10. It might also suggest an analogy to the theory of the firm, in which high fixed costs imply economies of scale over some range. However, the important feature in our case is that marginal costs are a function of fixed costs, which makes the capital theory analogy more apt.
  11. For ethnographies of tribal credit societies that highlight the specific norms and routines that enforce the incentive-compatibility of time-separated exchange, see e.g. Chagnon ([1968] 2009) on the Venezuelan Y?nomamö and Wiessner (1977) on the Botswanan !Kung San. There appears to be some variation in the stringency of enforcement based on the variance of the returns to hunting and gathering. Where this variance is high, as in Botswana, tribal credit also functions as a sort of social insurance: gifts are more, though not completely, gratuitous. Wiessner also documents several vivid escalations of the punishment aspect.
  12. Smith, et al. (2016) show that cooperation and reciprocity fall dramatically as tribal membership becomes more fluid. Bowles & Gintis (2008) also argue that the regular and honest publication of private information (“gossip”) is not incentive-compatible except on the assumption of some degree of prosocial, other-regarding preferences (“true” altruism), including the willingness to inflict costly punishments on defectors. Tomasello (2009) demonstrates that humans do indeed possess such preferences innately (i.e. from birth), and uniquely in humans as compared to other primates. Bowles & Gintis (2004) construct a plausible model of their evolution.
  13. For historically important examples of premonetary trading networks, see Malinowski (1922) on tribal credit, and Mederos & Lamberg-Karlovsky (2004) on customary exchange.
  14. Polanyi (1945, ch. 5) makes a similar point on inter-group trade. However, per Marwick, it is not the case that “economic man” with his tendency to truck and barter for private advantage is a late development in the history of mankind. Nor, on the other hand, is it the case that primitive societies can be adequately interpreted as the atomized homines oeconomici of modern financial markets. Rather, we find that cognitively modern man, even in his most primitive state, possesses both the deliberative capacity to truck and barter outside the tribe, and the social altruism necessary to credibly commit to cooperative exchange within the tribe.
  15. The widespread failure of ancient Mesopotamian tribal societies to voluntarily adopt the accounting methods of nearby customary exchange societies (Lamberg-Karlovsky 2003) suggests that selection, rather than learning, is the predominant driver of change. In either case, the fact that the scale of a society must bump gently on the ceiling set by its exchange institution seems to suggest that any “big push” effort to monetize a society is likely to fail, for the same reasons that “big push” investment failed as a development strategy: both elements of the mutual feedback must proceed pari passu, in this case to ensure either that the requisite learning is feasible, or that the scale does not outpace the natural variation in exchange institutions.
  16. See footnote 11 for suggestive ethnographies. For the Yąnomamö, the jungle is large, and though some places are more preferable than others, a displaced village generally will not lack a suitable place to set up camp. The San, on the other hand, have a birth rate sufficiently low on the whole (Wiessner speculates due to poor nutrition) that any given camp is as likely to merge with another as to split.
  17. The interesting feature of the Rossel Island case is that there was no simultaneous exchange rate between the different media, but conversion was reckoned intertemporally: a loan would be given in one medium, and after a certain period of time repaid with an equivalent number of the next highest medium.
  18. Political organization along the lines of identity rules, as opposed to impersonal rules, is the key distinctive to what North, Wallis, and Weingast (2009) call the “natural state”. Economic organization along customary exchange lines is thus complementary, and the two for the most part tend to coexist.
  19. On the relation between religion, cooperation, and social scale, see e.g. Shariff & Norenzayan (2011); Purzycki et al. (2016). The argument in the present paper is that exchange is a significant mediator of this relationship; the primary area in which a cooperative strategy benefits the group. Other possible mediators include the provision of public goods (Johnson 2005). Because a public goods game is isomorphic to an n-person prisoner’s dilemma, literature that deals with religion’s effect on “cooperation” broadly speaking cannot distinguish the relative importance of regularized exchange and public goods provision. Of course, this also means that the public good in Johnson (2005) can be interpreted as cooperation itself.
  20. There is a large literature attesting to the origin of writing out of the accounting practices and “para-writing” devices of preliterate customary exchange societies such as the knotted quipu of the Incan empire. See e.g. Schmandt-Besserat (1992). For our purposes the distinction is important merely as an incremental, not an epochal, advance.
  21. It is curious in this connection that Hudson concludes by criticizing “modern [economic] ideology” for “hold[ing] public planning to be inherently inefficient”. The question, of course, is efficiency at what scale? That something akin to palatial central planning brought ancient Mesopotamia from tribal credit to customary exchange around 2000 B.C. has scant relevance to industrializing or industrialized societies in 1917 or 2017 A.D., whose division of labor is orders of magnitude more complex than that of ancient Uruk. As Lavoie (1985, p. 61) argues, “the use of the unconscious ordering mechanism of the price system and money calculations has led to such an advance in the complexity of the social production process as a whole that it is no longer possible for the human mind [or, we might add, a palace bureau] to directly subsume this process under conscious control.”
  22. With periodic and sometimes extended interruptions when the volume of exchange collapsed, most notably in Europe at the opening of the Middle Ages. See the following section.
  23. However, Hudson (2003b) argues coinage was in fact sufficiently unreliable until the late medieval period that, compared to the weighing of ingots, its adoption must be thought of as a politically driven regress rather than a spontaneous cost-saving advance. On this point see also Kohn (1999).
  24. Alchian (1977) argues that low informational costs (i.e. of assessing the quality) of some good are an essential quality for the emergence of money. In light of the account here, the fact that loosely standardized coinage persisted for so many centuries suggests, first of all, that the informational costs of exchanging non-cash goods under barter are even higher; and second, that the fixed costs of economic integration and standard coinage are also extraordinarily high.
  25. Hayek (1945) is the canonical statement. Mises ([1920] 1935), anticipating the subsumption of market prices under the notion of extended cognition, also refers to market prices as “aids to the mind”.
  26. We may, therefore, add to their “takeoff conditions” a low-marginal-cost monetary system.
  27. Cryptocurrency is the prototypical example, but nonmonetary records can also be easily managed with the same technology. In this sense the best historical precedent might be the invention of double-entry bookkeeping: a revolutionary development in business organization used predominantly for, but not necessarily limited to, monetary values.
  28. The conquering Germanic tribes, for their part, “could not handle the mechanism of administration that they had inherited. . . . [T]he decline of trade and the growing scarcity of money made the extension, or even the maintenance, of a large salaried officialdom more and more difficult” (ibid., p. 260). Bloch goes on to describe various monarchs’ efforts to establish public order and regular exchange through new customary status relationships instead.


Anthropology, Bitcoin, Capital, Cooperation, Development, Epistemology, Increasing Returns, Institutional Substitution, Institutions, Money, Adam Smith, Axel Leijonhufvud, Bronisław Malinowski, Carl Menger, Caroline Humphrey, Doug North, Elizabeth Spelke, F.A. Hayek, L Randall Wray, Ludwig Lachmann, Michael Tomasello, Napoleon Chagnon, Nicholas Kaldor, Polly Wiessner, Steven Horwitz, Wesley Mitchell


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  • 1


    Dec 30, 2015 at 11:20 | Reply

    ‘Liberating’ replaced by ‘Incarcerating’ and the conclusion would be more appropriate – Thus, in the sense of expanding choice in both occupation and consumption, money – once it comes to its own – is perhaps the most liberating institutional innovation in human history.

  • 2

    Lorenzo from Oz

    Jan 12, 2016 at 1:27 | Reply

    “Enough people returned to subsistence agriculture that the whole process began to unravel, and Europe fell back for a time to the customary barter equilibrium. ”

    Manorial economies are NOT barter economies. While cash was not much used within a manorial estate, money as a unit of account certainly was. They are much more credit economies than barter economies. “Customary credit” would be a better term than “customary barter”. Although “customary obligation” would be better still. One was dealing with multi-generational systems where, in the case of serfdom, labour was immobile. Long-term obligation structures were perfectly feasible and were used.

    Other than that, a very informative paper, thank you.

    • 3

      Cameron Harwick

      Jan 12, 2016 at 1:43

      So cash was a means of settlement, but not a medium of exchange? I’d be very interested if you have a source – everything I found on manorial exchange institutions was rather sketchy on the details. By “barter” I was referring mainly to the payment of wages in-kind.

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