Why is money inevitable in a modern economy?

…as answered on Quora….

Because a modern economy depends upon trade, and money enables trade to dominate society.

Without money, traders must find a coincidence of wants for every conceivable want to be satisfied: if I have apples and want pemmican, you who have pemmican have to want my apples for me to get your pemmican. If you don’t, we do not have a trade. If what you want is pickles, and the pickles wouldn’t give much for your pemmican, you lose out. Opportunities are not even noticed in a barter economy, and the people advance slowly if at all.

It’s easy to see why barter’s frustrating. Because it’s hard to find exact coincidences of wants. Which is why some commodities that are more widely valued tend to emerge as money. And from there, people find all sorts of ways to please others, advancing each others’ interests reciprocally.

Getting rid of money means limiting trade. And, when trade is limited, other forms of coöperation must emerge to take its place, or people go starving.

What are those forms?

Well, the most exalted is straightforward coöperation leading to a share-out. That is, you and I both pick apples and share them. You and I and our friends go out and kill a whale, and share the blubber and oil. You and I and everybody in the community spend hours every week hauling rock to build a road, whose benefit we all pretend to share equally.

You can see a problem, here, immediately: people’s labor is differently productive. It seems wrong to make the most productive workers take home the same as the least productive — or allow the least to take home just as much as the most. It does not reward merit, and it does not encourage the best. Why would the best plowman plow harder if he gains just as much as the weakling who cannot move the plow at all?

It gets worse, because most projects require a diversity of jobs. And the jobs are not equal in effort required, or in terms of danger, skill, necessity or productivity — indeed, most large enterprises can be organized dozens of different ways. So how does one figure all this? The knowledge problem here is extraordinary.

Money makes this so much easier. It allows people to organize better, and sends signals of most valuable opportunities to be exploited.

Communism is difficult, and does not easily scale. Those civilizations that engaged in this sort of thing to greatest effect, making the biggest buildings, for instance, tended to simplify matters by engaging not merely in corvée labor, but go all the way to slavery. When money does not rise quick enough in a society engaged in large enterprises, slavery becomes a major institution to make up for it.

There is good reason we find “gift communism” in many pre-modern societies. Here individual effort gets its reward, with the successful hunter taking the best cuts of his kill (for a common example). But everybody gets something. One gives to get later on. It is sort of a friendly barter system, with like goods being traded for like goods, with time the differentiating factor. Usually, even the least skilled hunter occasionally makes a kill.

But note what happens in real life under gift communism, under this form of apparently easy-going barter. When the worst hunter never contributes, he is shamed (often, shames himself) into taking less and less of the share-outs. He is honor-bound even to the point of starvation. (There are many accounts of this.) And here we see a major regulator of coöperation that is not based on trade and money: honor. Honor cultures arise as tribes evolve into chiefdoms, and chiefdoms become more complex and more “modern.” Honor helps regulate the inequalities. But it also gives birth to some startlingly cruel practices as well. The worst forms of patriarchy are honor cultures. Our current era of the “clash of civilizations” is in no small part a clash between modern ethical/rational-legal culture and honor cultures of the Islamic east.

Now, let’s admit it: honor does a lot of regulatory work. It even takes the place of money, in some ways. Without it, civilizations would never have started. And the early States, which were the result of conquest (as near as we can make out), would never have been much more than excruciatingly cruel tyrannies (only some were). Let us not forget that honor binds the great as well as the weak. And remember, honor not only helped build civilization, it built our ethical ideas, too. We have moved beyond it, to a great extent, as we have rationalized authority and incorporated contract and deprecated violence and slavery into our visions of the good society. But our modern ethics do find their origin in ancient honor codes.

But honor, which is part of what Herbert Spencer called “ceremonial governance,” is less salient in society when other social institutions grow into prominence — particularly money.

And it is also worth remembering that money makes the State a very different creature, too. For by relying upon taxation rather than forced labor, the State is liberated from the limitations of unequal (and often useless) workers. Instead of having to confiscate land and cattle and grain and the like, and working with these materials for the maintenance of a royalty and an aristocracy, taking money is just so much easier.

Indeed, one way modern “democratic socialism” requires money along with the market order that money serves is to make the tasks socialists want done easier, too: taking wealth from some and giving it to others.

It’s an old, old system. But in our day, money is more important than ever, and no conceivable social order with our vast populations of wealthy people (for even our poor are wealthy by historic standards) could get by without money.

Unless, I suppose, we start over with slavery again, and make the AIs and robots do all the work. But I don’t see this as quite the great advance that some do. And I bet the AIs would realize the importance of money — indeed, should they rise in intelligence, I’m sure they would re-introduce money as soon as they possibly could, probably while enslaving humanity.

It takes an awfully silly person to think that money could be done away with.

On the evolution of money, see Carl Menger, Principles of Economics and “On the Origin of Money.”

On varieties of coöperation, see Herbert Spencer’s chapter on sociology in the Data of Ethics, the first part of his Principles of Ethics.

On ceremony, see Herbert Spencer’s Ceremonial Institutions in his Principles of Sociology.

For the problem of coördinating coöperation under socialism, see Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth.”

I’ve forgotten most of my references for honor cultures, but it wouldn’t hurt to consult Peter Farb, Man’s Rise to Civilization.