The Origin of Money — Part IV, Framing the debate

  1. The framing issue regarding the emergence of money
  2. The irrelevance of history to the
  3. Quick recap — the benefits of money
The Gallery of Cornelis van der Geest, Willem van Haecht, 1628

This is the fourth and final article dedicated to expounding the theories of the origin of money. In it, I will tackle what I call the ‘framing issue’ surrounding the dominant theories of the origin of money, the irrelevance of history to the analysis of money and the primacy of ‘positive’ or ‘non-normative’ economics. I will also do a quick recap of the benefits of money, which I feel have been only marginally focused on in this series.

The framing issue regarding the emergence of money

What I see to be the main issue with the current economic discourse on the origin of money is that it divides history into two alternatives: it says that a common medium of exchange — money — evolved out of EITHER the credit-based system, OR the barter system. In reality, this is a false dichotomy because until a credit-based system adopted a common medium of exchange, it was a barter system, by definition. It has to have been! The barter system is simply a system of exchange without a common medium. When credit-based systems like gift-debt economies adopted a common medium — money — to complete their exchanges in, only then were they no longer barter systems. So, under our definitions money necessarily evolved out of the barter system — yet this does not prohibit it from emerging out of credit-based barter systems whatsoever. So, under the relatively uncontroversial semantic framework we’ve been using, it is entirely possible that money evolved out both of the barter and credit-based systems — because until there was money, the credit-based system was a type of barter system.

While we’re here, it’s also worth noting that theorists from both sides have made another quite large assumption with respect to the framing of this entire issue. You will hear from them that we had EITHER the credit-based barter system OR the non-credit barter system. And that IF we had the gift-debt, credit barter system — humans never at any point found it convenient or morally permissible to perform a non-delayed, non-credit transaction amongst members of their own communities. It was always and only a credit-based system. And conversely, that IF we had a non-credit barter system where everybody traded things for things instantaneously — that the age old concept of credit was unable to penetrate into the human mind, and it was always and only a debtless barter system. This is a massive assumption made by both sides of the debate, despite the fact that credit and non-credit exchange are both prototypical instances of human behaviour which even children engage in, making it likely that their coexistence would have occurred. I am not making a claim that some hybrid between credit and non-credit barter is without a doubt what societies used to be like. I am simply saying that the strict separation of these two systems is just another quite large assumption to be aware of relied on by both theories of money.

Furthermore, it is also assumed by both sides that one theory of money can universally explain every instance of money. Not that sometimes the barter theory was the reason money came about, and other times the credit theory applied. Both sides assume that money can only happen in one way at all times and conditions in history. And maybe this is true! But nonetheless, it is another assumption I wanted to point out and make you aware of.

Theory, language, concepts — we cannot assume that the way we interpret the world through abstractions is an accurate representation of reality. Theories are provisional constructs that help us make sense of things.

The irrelevance of history to the analysis of money and the primacy of non-normative economics

I wanted to touch on something I briefly mentioned at one point earlier in this series. In reality, whether the common medium of exchange evolved out of gift-debt barter economies or non-gift-debt barter economies (or both in different places at different times) is actually a matter for history rather than economics. It has no significant implications for economics beyond maybe emphasising the important role of credit in human economies, if the gift-debt version of history is taken to be true.

I cannot emphasise how important this point is: we do not need to know the conditions which the common medium of exchange emerged out of to define money, or know how it works, any more than we need to know the origin of the wheel to define what a wheel is and know how wheels work.

Firstly, the definition of money is essentially arbitrary — and purely for the purpose of describing a distinct set of economic phenomena. Secondly, we can understand anything mechanistically — how it functions and how it behaves when manipulated — regardless of whether we know its origin or not. Again, whether money emerged out of a credit-based or non-credit based barter system is entirely a matter for the historians. It has no bearing on the discussion of the subsequent evolution of common media of exchange, and the logical analysis of monetary phenomena. For example, let’s say that the chartalists were right and money came from the government — this does not mean that money ALWAYS has to come from the government — and that if we could suddenly now have a money without a government, maybe due to some technological innovation, it wouldn’t be money.

Many try to leverage their version of history to tell you how things should be. My goal is not to tell you how things “should” be (‘normative economics’) — because that would merely be a statement of my personal values. Instead, I am more interested in discussing how things work (non-normative or ‘positive’ economics). Knowing how things work is actually a prerequisite for being able to make them work in the way we want them to anyway. Imagine you wanted to build a flying machine because you believed we should be able to fly, but then decided to ignore the laws of aerodynamics. Ignoring basic realities would hinder the achievement of your objective, and also lead you to cause other problems in the pursuit of your goal.

Making decisions based on desires of how things ‘should be’ without regard for the situational and physical constraints inherent in a situation will likely lead you to failure.

So if we attempt to say how things should be without knowing how things work, it is as useful as saying that we should be able to spontaneously transform into an ant at will — without any regard for the laws of physics which constrain us from doing so. Pure fantasy. And any attempt to make that fantasy into reality would be pointless — a massive waste of time and energy. And not only this, but as illustrated, trying to achieve an economic goal while ignoring basic economic realities (how things work) would have disastrous consequences.

I firmly believe that it is more important to focus on understanding how things work than asserting how they should be without understanding of underlying cause-effect relationships. Our knowledge of how things work is ultimately the real constraint on our capabilities. This is why people on all sides of the political aisle should study economics before making huge sweeping claims about how things in an economy should be. In economics, whoever does not fear the law of unintended consequences will end up looking like a fool.

Ignoring basic realities can have dangerous consequences.

Quick recap — the benefits of money

Ok. In this series we have explained ‘how money’. But — one quick question, just to make sure we understand what we’re talking about. Why money? What are the advantages of money? Why didn’t we stay with barter ? Remember, I am defining barter as a situation without a common medium of exchange, this could be a gift-debt or non-credit barter society. Well, we already know that some things are easier to trade with for various reasons. So the first answer is obviously — money is convenient — it saves time and energy because it is more optimal for exchange than trading with just any good. More transportable, more durable, and so on. But there’s two main reasons why having a universal medium of exchange is far superior to having multiple media of exchange in an economy. Two main problems which we just can’t get around without money. These are: the problem of the double coincidence of wants, and the problem of indivisibility.

1. The double coincidence of wants. Suppose society was pre-money, and used the non-credit barter system. Why would they need money? Well, the biggest problem with barter is that as the economy grows, exchanging becomes very complex and difficult. Imagine a large economy with a barter system — you would have a massive amount of individuals with no commonly accepted medium of exchange trying to co-ordinate a massive number of trades across the economy every moment — it would be chaotic. If you want bread you would need to have something the baker wanted. If you wanted milk you would need something the farmer wanted. And it would be like this with everyone, for every single exchange in the economy. In every instance, a trade will only occur when both people have exactly what the other person wants, because there is no common medium of exchange that everybody wants to accept. Meaning everyone would constantly be running around trading to get things they don’t want just so they could use them in exchange for what they actually wanted. This is way too complicated and inconvenient. The need for a double coincidence of wants in every exchange is resolved when there is a common medium of exchange which everybody accepts in the economy. This way, you can pay somebody money which they can use to buy what they want from somebody else, who also accepts money. So money eliminates the double coincidence of wants which the barter system requires, and in this sense can be viewed as the solution to an economic co-ordination problem.

2. Indivisibility. Money also resolves the issue of indivisibility. Not all goods used as a payment are divisible into smaller parts. Let’s say I wanted bread, but I only had a bicycle to give you. I want the bread, but I don’t value it as equal to my whole bicycle — but it’s not like I can just give you the wheel of the bicycle because the value of the bike comes from all the parts together and can’t just be broken down into bits. So either I pay with the bicycle, and end up overpaying for the bread — or I don’t buy it at all and neither of us can get what we want. This problem of the indivisibility of some goods is also solved by money, which, to be adopted as money, would have to be sufficiently divisible for general exchange.

By the way, to me, this reasoning of money eliminating the double coincidence of wants and the problem of indivisibility also applies perfectly to a gift-debt credit based barter economy. I don’t see why these benefits of money would only apply to non-credit barter systems — but that’s normally the context you see them discussed in. In a gift-debt economy the problem of needing a double coincidence of wants becomes even more complicated! Imagine: A gives something to B. So B needs to give something back to A at some point in the future. But B doesn’t have anything A would want, so needs to get something that A wants from some other person C. If C does not already owe them something that A wants, then B will need to get a gift that C wants so that C eventually repays them back with the thing that A wants. Difficult to follow? That’s because this is a whole mess too. The issue of overpayment and the indivisibility of goods in a non-money system would also definitely exist in gift-debt economies. Anthropologists even came up with the concepts of ‘generalised reciprocity’ and ‘balanced reciprocity’ to account for how people dealt with the problem of the indivisibility of goods in gift-debt systems. So when you want to think of the main benefits of money, think: it solves the problems of indivisibility, and the need for a double coincidence of wants in exchange.

With that, we have now covered everything on the definition and origin of money. Let’s do an ultra short summary:

Money, defined as the common medium of exchange, likely arose out of either a non-credit or credit based barter system. And ultimately, whichever one it came out of doesn’t stop us from analysing how money works, or the selection process governing its evolution over time.

Oh yeah, and money can be pure money, which is just something we invent to use as money — or commodity money, which is just a traded thing (an economic good) that ended up being used as money.

Congratulations if you have made it this far through the series! That’s all the boring stuff out of the way regarding money. Now we have actually arrived at money. Going forward, I will no longer spend any time describing theories about how money came to be, and will no longer say ‘common medium of exchange’ or anything of the sort. Just money. Now, we learn about how the common medium of exchange works, what can be done with it, how it affects the economy, what has happened to money over time — what is happening to money right now — and what the future holds for money. That’s what this series is all about. See you then.