Nick Szabo

Shelling Out: The Origins of Money:

In a population of cheaters and suckers, the cheaters always win. However, sometimes animals come to cooperate through repeated interactions and a strategy called Tit-for-Tat: start cooperating and keep cooperating until the other party cheats – then defect yourself. This threat of retalation motivates continued cooperation.

The situations where such cooperation in fact occurs in the animal world are highly constrained. The main constraint is that such cooperation is restricted to relationships where at least one of the participants is more or less forced to be in the proximity of the other

When H. sapiens sapiens displaced H. sapiens neanderthalis, population explosions followed. Evidence from the takeover in Europe, c. 40,000 to 35,000 B.P, indicates that H. sapiens sapiens increased the carrying capacity of its environment by a factor of ten over H. sapiens neanderthalis – i.e., the population density increased tenfold[C94]. Not only that, the newcomers had spare time to create the world’s first art – such as the wonderful cave paintings, a wide variety of well crafted figurines – and of course the wonderful pendants and necklaces of seashells, teeth, and eggshell.

These objects were not useless decorations. Newly effective wealth transfers, made possible by collectibles as well as other probable advance of the era, language, created new cultural institutions that quite likely played the leading role in the increase of carrying capacity.

We shall describe how collectibles lowered transaction costs in each kind of wealth transfer – in the voluntary free gift of inheritance, in voluntary mutual trade or marriage, and in the involuntary transfers of legal judgments and tribute.

All these kinds of value transfer occured in many cultures of human prehistory, probably from the beginning of Homo sapiens sapiens. The gains to be made, by one or both parties, from these major life event transfers of wealth, were so great that they occurred despite high transaction costs. Compared to modern money, primitive money had a very low velocity – it might be transferred only a handful of times in an average individual’s lifetime. Nevertheless, a durable collectible, what today we would call an heirloom, could persist for many generations and added substantial value at each transfer – often making the transfer even possible at all. Tribes therefore often spent large amounts of time on the seemingly frivolous tasks of manufacturing and exploring for the raw materials of jewelry and other collectibles.

The Kula trading network of pre-colonial Melanesia. The kula valuables doubled as “high power” money and mnemonic for stories and gossip. Many of the goods traded, mostly agricultural products, were available in different seasons, and so could not be traded in kind. Kula collectibles solved this double-coincidence problem as an unforgeabaly costly, wearable (for security), and circulated (literally!) money. Necklaces circulated clockwise, and armshells counter-clockwise, in a very regular pattern. By solving the double-coincidence problem an armshell or necklace would prove more valuable than its cost after only a few trades, but could circulate for decades. Gossip and stories that about prior owners of the collectibles further provided information about upstream credit and liquidity. In other Neolithic cultures collectibles, usually shells, circulated in a less regular pattern but had similar purposes and attributes.

For any institution in which wealth transfer is an important component, we will ask the following questions:

1 What coincidence in time between the event, the supply for the transfered good, and demand for the transfered good was necessary? How unlikely or how high a barrier to the wealth transfer did the improbability of coincidence represent?

2 Would the wealth transfers formed a closed loop of collectibles just based on that institution, or were other wealth transfer institutions necessary to complete circulation cycles? Taking the actual flow graph of monetary circulation seriously is critical to understanding the emergence of money. General circulation among a wide variety of trades did not and would not exist for most of human prehistory. Without completed and repeated loops collectibles would not circulate and would become worthless. A collectible, to be worth making, had to add value in enough transactions to amortize its cost.

Food is worth far more to starving people than to well fed ones. If the starving man can save his life by trading his most precious valuables, it may be worth to him months or even years of the labor it might take to replace that value. He will usually consider his life worth more than the sentimental value of the family heirlooms. Like fat itself, collectibles can provide insurance against food shortages. Starvation from local shortages could be staved off with at least two different kinds of trades – for the food itself, or for foraging or hunting rights.

Nevertheless, the transaction costs were usually too high – bands were far more likely to fight than ever trust each other. The hungry band that couldn’t find its own food usually starved. However, if the transaction costs could be lowered, by lowering the need for trust between bands, food that was worth a day’s labor to one band might be worth several months’ labor to the starving band.

Thus there were at least four gains, or sources of surplus, from a trade cycle as simple as two prey species and two non-simultaneous but offsetting trades. These gains are distinct but not necessarily independent:

1 An available source of meat at a time of the year when one would otherwise starve.

2 An increase in the total supply of meat – they traded the surplus beyond what they could eat immediately or store; what they didn’t trade would have gone to waste.

3 An increase in the variety of nutrition from meat, by eating different kinds of meat.

4 Increased productivity from specialization in a single prey species.

Pattern of hxaro exchanges and kinship relations among neighboring tribes of !Khung San hunter-gatherers.

One of the main things the !Kung buy and sell with their collectibles are abstract rights to enter another band’s territory and hunt or gather food there. Trade in these rights is especially brisk during local shortages which can be alleviated by foraging in a neighbor’s territory[W77][W82] !Kung bands mark their territories with arrows; trespassing without having purchased the right to enter and forage is tantamount to a declaration of war. Like the inter-band food trade discussed above, the use of collectibles to purchase foraging rights constitutes an “insurance policy against starvation”, to use the phrase of Stanley Ambrose

On a larger scale, the Laffer curve may be the most important economic law of political history. Charles Adams[A90] uses it to explain the rise and fall of empires. The most successful governments have been implicitly guided by their own incentives – both their short-term desire for revenue and their long-term success against other governments – to optimize their revenues according to the Laffer Curve. Governments that overburdened their taxpayers, such as the Soviet Union and later Roman Empire, ended up on the dust-heap of history, while governments that collected below the optimum were often conquered by their better-funded neighbors. Democratic governments may maintain high tax revenues over historical time by more peaceful means than conquering underfunded states. They are the first states in history with tax revenues so high relative to external threats that they have the luxury of spending most of the money in non-military areas. Their tax regimes have operated closer to the Laffer optimum than those of most previous kinds of governments. (Alternatively, this luxury may be made possible by the efficiency of nuclear weapons in detering attack rather than the increased incentives of democracies to optimize to tax collection).

Kula Ring:

Abstract: A variety of vague cultural explanations have been proposed for the unique Melanesian trading instituion, the kula ring. Landa[L94] proposed an explanation based on credit risk and gossip. This working paper provides a rigorous explanation based on the author’s theory of collectibles and specific cycles of circulation as detailed in Shelling Out — The Origins of Money and using minimal trust assumptions.

On transportation cost:

Metcalfe’s Law states that a value of a network is proportional to the square of the number of its nodes.  In an area where good soils, mines, and forests are randomly distributed, the number of nodes valuable to an industrial economy is proportional to the area encompassed.  The number of such nodes that can be economically accessed is an inverse square of the cost per mile of transportation.  Combine this  with Metcalfe’s Law and we reach a dramatic but solid mathematical conclusion: the potential value of a land transportation network is the inverse fourth power of the cost of that transportation. A reduction in transportation costs in a trade network by a factor of two increases the potential value of that network by a factor of sixteen. While a power of exactly 4.0 will usually be too high, due to redundancies, this does show how the cost of transportation can have a radical nonlinear impact on the value of the trade networks it enables.  This formalizes Adam Smith’s observations: the division of labor (and thus value of an economy) increases with the extent of the market, and the extent of the market is heavily influenced by transportation costs (as he extensively discussed in his Wealth of Nations)


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