32 Pages Posted: 25 Dec 2015 Last revised: 8 May 2017
Date Written: May 8, 2017
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: Suggested Citation
Harwick, Cameron, Money and Its Institutional Substitutes (May 8, 2017). Available at SSRN: https://ssrn.com/abstract=2707833