Money and Its Institutional Substitutes
George Mason University - Department of Economics
January 14, 2017
This paper relates Smith’s dictum that “the division of labor is limited by the extent of the market” to developments in anthropology and sociobiology to offer an increasing returns model of the evolution of exchange institutions from autarky, through various intermediate stages, and finally to monetary exchange as the extent of the market grows. Exchange institutions will involve a tradeoff between fixed and marginal cognitive costs: up-front investment in increasingly higher fixed-cost exchange institutions lowers marginal costs of exchange, resulting in increasing returns to the division of labor. Those costs account for the persistence of more or less direct barter in more primitive societies, despite the “inevitability” of monetary exchange that seems to be a feature of traditional models of the origin of money. In identifying the relevant fixed costs of money and its institutional substitutes throughout the world, the paper advances a framework through which the successes and failures of modern development can be understood.
Number of Pages in PDF File: 28
Keywords: Money, Institutions, Economics
JEL Classification: E49, N1, O11, O31, P51
Date posted: December 25, 2015 ; Last revised: January 16, 2017