How many people for money to work?

[afterzir]

Imagine an island.

If one person inhabited the island, then there wouldn't be money.

If 1,000 people inhabited the island, then there would be money.

Therefore, counting up from 1 to 1,000 men, at some point money is used.

What is the least number of people for this? Is it 3? (would 2 people result in zero-sum?)

[shirgall]

Quite literally the scenario in this book.

 

http://www.amazon.com/How-Economy-Grows-Why-Crashes/dp/1118770277

[Pepin]

Difficult to say because there are so many factors it would depend on. The big issue is that with lower populations, putting a price on something is very hard because how much each individual values the good will likely vary widely, especially since it will depend a lot of the individual's current situation. With more people in the market, individual circumstances and preferences are averaged out.

 

I'd say about 20-50 people for a currency to arrive, with the caveat that it would be very unstable and likely to collapse. I think there is evidence for this estimation given some villages that used tobacco as a currency in the 1700s, and prisons and schools where temporary currencies pop up a lot.

[ParaSait]

It doesn't really have so much to do with the number of individuals, more like with specialization. The more specialization there is for individuals in a society, the higher the need for money. Of course, if you have more individuals, specializing becomes more viable. But the sheer number of people isn't the direct reason why money is used.

 

(see one of the first chapters in mises' "a theory of money and credit" - he explains how money becomes naturally established)

[tasmlab]

Quite literally the scenario in this book.

 

http://www.amazon.com/How-Economy-Grows-Why-Crashes/dp/1118770277

 

I've bought like five copies of this book so far.  I hand them out to people new to economics.  My 9 year old daughter read it a few months ago.

[J. D. Stembal]

What is the difference between the collector's edition and the 2010 edition of the Peter Schiff book? It looks like it has 30 more pages. Is there a forward or appendix added? I don't like spending more than $10 on any one book.

[shirgall]

What is the difference between the collector's edition and the 2010 edition of the Peter Schiff book? It looks like it has 30 more pages. Is there a forward or appendix added? I don't like spending more than $10 on any one book.

 

New chapters and color illustrations. From the intro: "And so we decided to put together a 'Collector's Edition' that is bigger and more colorful than the original. We spiffed up the title pages, added a bunch of new graphics, and upgraded the paper stock from rough pulp to smooth and glossy." They also rewrote some material into the storybook format that was popular in the first edition, performed clean-up edits throughout, and added chapters about quantitative easing and the European debt crisis.

[tasmlab]

New chapters and color illustrations. From the intro: "And so we decided to put together a 'Collector's Edition' that is bigger and more colorful than the original. We spiffed up the title pages, added a bunch of new graphics, and upgraded the paper stock from rough pulp to smooth and glossy." They also rewrote some material into the storybook format that was popular in the first edition, performed clean-up edits throughout, and added chapters about quantitative easing and the European debt crisis.

 

I bought the collector's edition despite having the original just to have it in my collection, but I don't think there's a remarkable difference in content.

[J. D. Stembal]

Thanks, guys!

[st434u]

The minimum number is two. Obviously it wouldn't be zero-sum, as all trades happen only if both parties believe they are gaining something from the transaction.

 

It's a gradual process, anyway. It's unlikely that an economy of just two people would develop money, because at that level, barter is quite efficient. The more people and more complexity you add to the economy, the more benefit is gained from adopting a common medium of exchange that others are already using for barter.

 

However, -and this is where a lot of people get mistaken when thinking about money-, it's important to realize that money is not fundamentally different from barter, in the sense that money arises out of barter as a gradual process whereby in the barter exchanges, people start to favor some items over others for the purposes of bartering.

 

In simple barter, you show what items you have to trade with, and the other person shows you what they have, and if both want what the other has up for trade, you negotiate on exchange ratios and maybe strike a deal. In complex barter, you may not only be looking for things you want to consume or employ in production yourself, but you may also be looking for things that you know for a fact others in particular will want, so you are thinking of trading these items away to those particular individuals.

 

When you go from that level one step further, you are looking for things that you know are in demand by so many, that you're not necessarily thinking of trading them to anyone in particular, because you know that a lot of people want them and you won't have problems finding someone who does. At this level, and particularly if many of those individuals who demand these items are demanding them for the same reason you are, you are using money.

 

Keep in mind that the only reason these items that have now become money have any value in the first place is because there are several people in the economy who want to consume them, and/or employ them in the production of something else. They provide the "core" demand for this item, and then the monetary demand (or bartering demand, if you will) is added on top of that. If at any point and for any reason, the core demand (also known as intrinsic value) is stripped from an item that is being used as a medium of exchange, the item may continue to circulate, until people realize that the core demand is gone, and what this means for the long-term value of the item, and then there will be a run to get rid of all that you have as fast as you can. The value tanks either to the point at which somebody will come up and start consuming them again (or employing them in the production of other goods/services which in turn have consumption demand), or it will go down to zero.

 

If you believe money is something entirely different and detached from barter, that's how you get mislead into believing that currencies with no real intrinsic value can be a good form of money that will stand the test of time. They can't, and they won't.

[MrCapitalism]

I say the minimum number is 3. Money serves no purpose with one person, as there is no trade. With 2 people, all trades represent a coincidence of 'wants' between both parties. No medium of exchange is required, as all trades are direct. A third person is required at a minimum to create a situation of "double coincidence of wants" which can be solved by a "medium of exchange." The medium of exchange is the origin of money (Austrian theory of trade and money)

[st434u]

I say the minimum number is 3. Money serves no purpose with one person, as there is no trade. With 2 people, all trades represent a coincidence of 'wants' between both parties. No medium of exchange is required, as all trades are direct. A third person is required at a minimum to create a situation of "double coincidence of wants" which can be solved by a "medium of exchange." The medium of exchange is the origin of money (Austrian theory of trade and money)

 

Money can also act as a store of value. In trading current value for future value, it's conceivable that there could be money in use with only 2 people in an economy.

[Livemike]

While 2 is unlikely, it's impossible to know at what stage money would be viable.  Like all subjectively valued things, the market is the only way to decide when it's worth going to the effort of making it.

 

Remember medieval villages were almost entirely barter economies due to the rarity of precious metals and the inability of making small change (and almost all transactions were fairly small).  As the population grew more and more of the trades would be in money.  How far in the other direction could it go before money wasn't worth bothering about?  Hard to say.

[MrCapitalism]

Money can also act as a store of value. In trading current value for future value, it's conceivable that there could be money in use with only 2 people in an economy.

That would be an unnecessary complication. If money doesn't have a purpose for exchanges between 2 people, then it has no purpose in facilitating exchanges in the future.

 

If one party holds money until a later date when he trades it for goods, what is the 2nd person going to do with that money? They can only spend it trading with one person, which is who gave it to them in the first place. And they can only get in exchange the goods provided by the first person, which are the exact same good he used to get the money in the first place. (which brings up a good point, why did you give him the money in the first place??)

 

 

While 2 is unlikely, it's impossible to know at what stage money would be viable.

You're probably right in real world situations. Barter can still function beyond just 2 people, and the point at which using money becomes more efficient than barter depends on a lot of variables. Praxeologically, the minimum number of people to facilitate money remains 3.

[st434u]

That would be an unnecessary complication. If money doesn't have a purpose for exchanges between 2 people, then it has no purpose in facilitating exchanges in the future.

 

If one party holds money until a later date when he trades it for goods, what is the 2nd person going to do with that money? They can only spend it trading with one person, which is who gave it to them in the first place. And they can only get in exchange the goods provided by the first person, which are the exact same good he used to get the money in the first place. (which brings up a good point, why did you give him the money in the first place??)

 

You're probably right in real world situations. Barter can still function beyond just 2 people, and the point at which using money becomes more efficient than barter depends on a lot of variables. Praxeologically, the minimum number of people to facilitate money remains 3.

 

Suppose in this island there was a supply of wild rice. As time went by, the two people living there learned to process it into white, dry rice. They also learned to farm it. Further imagine that at least one, or ideally both of the people in the island liked to consume rice. Because white, dry rice will store for a long time, it's conceivable that they could start using rice as money, to settle all exchanges, as a store of value, and unit of account. They both would know that if they trade whatever they have right now for rice, they can either consume the rice at any point in the future, or they can trade it back for something that the other person has in the future, but doesn't have right now.

 

Your question of what they're supposed to do with the money is precisely what I was getting at in my first post in this thread. Money is supposed to be something you *can* consume, and/or employ in the production of other goods/services which in turn have consumption demand. It's not necessary that you yourself want to consume the money or the items produced with it, only that others in the economy want to, so that demand for it can be expected to continue for all foreseeable time.

[AncapFTW]

Suppose in this island there was a supply of wild rice. As time went by, the two people living there learned to process it into white, dry rice. They also learned to farm it. Further imagine that at least one, or ideally both of the people in the island liked to consume rice. Because white, dry rice will store for a long time, it's conceivable that they could start using rice as money, to settle all exchanges, as a store of value, and unit of account. They both would know that if they trade whatever they have right now for rice, they can either consume the rice at any point in the future, or they can trade it back for something that the other person has in the future, but doesn't have right now.

 

Your question of what they're supposed to do with the money is precisely what I was getting at in my first post in this thread. Money is supposed to be something you *can* consume, and/or employ in the production of other goods/services which in turn have consumption demand. It's not necessary that you yourself want to consume the money or the items produced with it, only that others in the economy want to, so that demand for it can be expected to continue for all foreseeable time.

I see an additional two possibilities.  Say two people crash on a deserted item.  The first day, person A catches two fish and finds a coconut.  Person B finds three coconuts.  Now, person A might not want another coconut, but person B may want a fish, so person B gives Person A his wedding ring in exchange.  At that point, isn't the ring a form of money, as Person B will always have a high demand for it and it is practically worthless to person A?

 

Also, say person B discovers how to preserve fish.  He buys fish from person A, cures them, then sells them back in once the fish start to dry up.   At that point Fish is a trade good, or a type of money, though it will have value to both of them.

[Jer]

2

This is a great concise explanation of money