Money and Its Institutional Substitutes

32 Pages Posted: 25 Dec 2015 Last revised: 8 May 2017

Cameron Harwick

George Mason University - Department of Economics

Date Written: May 8, 2017

Abstract

This paper builds upon Smith’s dictum that “the division of labor is limited by the extent of the market” to offer an increasing returns model of the evolution of exchange institutions from autarky, through various intermediate stages, and finally to mass monetary exchange. Exchange institutions are characterized by a tradeoff between fixed and marginal costs: the effort necessary to execute an exchange may be economized by up-front “investment” in strategies to facilitate the publication and accounting of trading histories. This allows a more intricate division of labor and thus effects increasing returns to the extent of the exchange network. The fixed costs of monetary exchange 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 economic development can be understood.

Keywords: Money, Institutions, Economics

JEL Classification: E49, N1, O11, O31, P51

Suggested Citation

Harwick, Cameron, Money and Its Institutional Substitutes (May 8, 2017). Available at SSRN: https://ssrn.com/abstract=2707833

Cameron Harwick (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

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