Money and Its Institutional Substitutes: The Role of Exchange Institutions in Human Cooperation

Journal of Institutional Economics, Forthcoming

33 Pages Posted: 25 Dec 2015 Last revised: 15 Jul 2017

Cameron Harwick

George Mason University - Department of Economics

Date Written: July 12, 2017

Abstract

This paper offers an increasing returns model of the evolution of exchange institutions building on Smith’s dictum that “the division of labor is limited by the extent of the market”. 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. Increases in the size of the exchange network select for higher-fixed-cost exchange institutions, beginning with autarky, through various intermediate stages, and finally to mass monetary exchange. By identifying the relevant fixed costs of money and its institutional substitutes across time, the paper both accounts for the persistence of premonetary exchange institutions, despite the “inevitability” of monetary exchange that seems to be a feature of traditional models of the origin of money, and illuminates the forces driving the transition from one to another.

Keywords: Money, Institutions, Economics

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

Suggested Citation

Harwick, Cameron, Money and Its Institutional Substitutes: The Role of Exchange Institutions in Human Cooperation (July 12, 2017). Journal of Institutional Economics, Forthcoming. 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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