Sunday, January 2, 2011

Money as a Crusoe Concept

Alone on an island Robinson Crusoe would need money.

Money is (1) a store of value and (2) a unit of account and (3) a medium of exchange. Money has social uses. So does language. We learn language socially, but the primary purpose of language is to enable personal thinking. Language is an individual skill. Alone on an island, Crusoe still needed language. 

Similarly, we learn to use money socially. Alone on an island, Robinson Crusoe would need money. Money's first attribute is its being a store of value. That is what allows money to be a unit of account and a medium of exchange. 

Crusoe's primary money was food. If he could store food, his labor could be invested. When he discovered that he had accidentally sowed wheat which “took” he was overjoyed. Robinson Crusoe might put most of his calculations in terms of wheat and thereby quantifiably value progress toward the completion of a boat. Building the boat was his most important long-term goal. It was to enable this that he engaged in indirect barter with himself. 

The division of labor (Adam Smith) necessarily creates a law of association (David Ricardo) which means that if you are going to undertake any complex task, then it is more efficient to break that down into repetitive actions, rather than carrying out the entire process in sequence. 

To build a raft, Crusoe must saw boards, drill holes, braid twine, etc.  Each should be done as a distinct task rather than sawing a board, drilling a hole, braiding a rope, and then drilling the next hole, braiding the next rope, and after four, going back and sawing the next board, and so on.  Thus, each task becomes an economic value to be traded with any other task. 

It is always possible to exchange goods and services with yourself across time. Should you plant? Build a fire and tend it? Catch fish? Look for coconuts? What you do on an island is determined by how you value your time and the return value that you expect for it. 

In your world today, you choose to work at one or more jobs, take on one or more hobbies, perform a changing set of household tasks.  You need bookkeeping of some sort and that means that you must have a unit of account. The more focused and rational your accounting, the better for you. Rather than being a social convention, money is an artifact of individual effort, thought and reward. 

Both the socialist Karl Marx and the capitalist Ludwig von Mises found the origin of money in social exchange.  Marx, after all, was writing social history. However, von Mises sought a priori foundations for economic theory. Yet, for von Mises the problem to be solved was the choice of gold (and silver) over other commodities. However,  Marx also said fifty years before von Mises that gold evolved as the best form of money, as the preferred commodity of indirect exchange.  

And it is true that money began in a social encounters, not in a Crusoe context.  But money did not begin as indirect barter in convenient commodities.  That came later.  The origin of money is in ritual gift exchange, in peace-making, amelioration, and friendship.


  1. I think your explanation of money for a man alone on an island is quite good, but I don't understand this statement:

    "The origin of money is in ritual gift exchange, in peace-making, amelioration, and friendship."

    Money always exists in any market. Money is simply the assets that are most liquid, durable, divisible, and most easily transported. In the past, each market chose myriad assets as the "money," of the local marketplace; tea leaves in China and tobacco in the American colonies.

    That is where the word "currency" comes from. In the past merchants might travel to a new marketplace and ask what the "most current" merchandise in use was at that time; which assets have the most currency, or liquidity, or tradability.

    Money is always there. The old story about the problems of barter exchange are a fantasy. Merchants will always use the most suitable asset as a medium of exchange, unit of account, and perhaps store of value.

  2. I think that before the "money" stage, there was a previous invention, the exchange of gifts. At first, it might have been that you offered what was valuable to you; eventually, you offered what was valued highly by the recipient. Stone Glasgow wrote, "The old story about the problems of barter exchange are a fantasy." I agree. "I have apples but do not need your eggs, so we will invent money" is not supported by historical fact. Wine was both produced locally and also traded at import and export in the Greek world. In short, anything different had a higher value.


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