I submitted this question to my parents after watching an episode of Star Trek as a lad. The sci-fi show exists in the 24th century where after a massive war in the 21st century the human race finally came together after meeting their first 
aliens. The culture of their 24th century does not have money. There is no greed, no hunger, and no such thing as a sub prime mortgage. The response I got from my parents was no easier to understand than when the show’s characters tried to. I was only like 9 or 10 at the time anyway. Whatever I had to get back to my Power Rangers Zord construction project. But I’ve spent the better part of a decade since trying to justify how a society would work without money; but that has lead me down a path to first determine why we have money right now.
To understand why we need money let us first go back to a time when there was no money. Picture with me a fake society in a remote area. There are 5 families, and they all farm. For the first generation everyone farms, relying only on themselves for all their needs. Food, water, shelter, they don’t need anything from the other families. Some people in the second generation discover their neighbors have strengths and weaknesses that complement their own. One guy is better at farming corn while the other can do tomatoes much better. They create an arrangement that allows them to trade crops. Efficiency and bartering are born because each specialist can now focus on their crop and increase their skill further.
By the forth generation there are multiple families with 100 different products and services to offer. The commodities exchange has become too crowded. One guy is very skilled with peach farming, but his product isn’t always needed from the milk family. So he trades for tomatoes, then wheat, and finally apples to get something the milk family wants. This takes hours and is no longer an efficient means of trade for anyone. Their time is better spent creating their product they’ve become so skilled at harvesting. Efficiencies were 10x of that of their great-grandparents but its been lost in this exchange. This little town decides to convert the exchange into a place where you can drop off your goods. Whenever someone wants to, they can drop off their goods and pick up what they need. Since everyone keeps their goods in the same spot and they don’t have to stand around waiting to trade, the families just pop in and out when they need to. Years of trading have established values like 5 tomatoes will get you 4 apples etc. A clerk supervises each transaction and the users pay him by giving up a small portion of their goods. Our little society has successfully created a depository. I’m so proud.
But problems persist. As the society enters the fifth generation, some specialists have branched out beyond farming. Instead they offer specialized services. A particular fellow has become quite skilled at construction and repair. He can build a barn for your cows and fix your plows, but he can’t take his product down to the depository and trade it for milk. Even if he could, it would take a lot of milk that the depository just doesn’t have. A new efficiency in construction has created an inefficiency in how to pay for it. A solution is needed. Under the supervision of the depository clerk, the milk farmer and handyman agree on the construction of a barn in exchange for right to receive regular deliveries of milk for 5 years. Now the handyman can take the milk down to the depository and trade for whatever goods he needs. This is the birth of an extension of credit.
So our little society has grown from a few simple families to a community of thousands. Everyone is focusing all their attention on a specialty. We have farmers, handymen, clerks, an exchange for products and even a method to compensate for complex services. But again, there are problems. The dairy farmer has increased his production so much that the value of milk has decreased. This doesn’t hurt the dairy farmer because he is putting out more milk than ever. The handyman traded his rights for milk delivery for rights in butter production. The butter producer is a new skill to the town that wouldn’t have existed if the dairy farmer hadn’t been able to expand his production which was all thanks to the handyman. The butter has more value at the exchange. These transactions are taking place all over town and the clerk can’t keep track of who owes what to whom and where. That clerk is a smart guy though, and he’s thought of a solution.
In summary, we started with a small group of families that each minded their own business. As they discovered one person was better at something they also found he could output more of that something if that’s all he worked on. The barter society was born by trading products and eventually services. But as the generations mounted and thousands became specialized there were thousands of products and services being traded. It was too complicated for the clerk to keep up with the trades going on and we’ll learn about his solution tomorrow.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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