Money as Minimal Complexity

We consider mechanisms that provide traders the opportunity to exchange commodity i for commodity j , for certain ordered pairs ij . Given any connected graph G of opportunities, we show that there is a unique mechanism M G that satisfies some natural conditions of “fairness” and “convenience.” Let M ( m ) denote the class of mechanisms M G obtained by varying G on the commodity set {1, …, m }. We define the complexity of a mechanism M in M (m) to be a pair of integers τ( M ), π( M ) which represent the “time” required to exchange i for j and the “information” needed to determine the exchange ratio (each in the worst case scenario, across all i not equal to i ≠ j ). This induces a quasiorder \preceq on M ( m ) by the rule M \preceq M ’ if τ( M ) ≤ τ( M ’) and π( M ) ≤ π( M ’). We show that, for m \u3e 3, there are precisely three \preceq-minimal mechanisms M G in M ( m ), where G corresponds to the star, cycle and complete graphs. The star mechanism has a distinguished commodity — the money — that serves as the sole medium of exchange and mediates trade between decentralized markets for the other commodities. Our main result is that, for any weights λ, μ \u3e 0; the star mechanism is the unique minimizer of λτ( M ) + μπ ( M ) on M ( m ) for large enough m

Reaching an equilibrium of prices and holdings of goods through direct buying and selling

The Walras approach to equilibrium focuses on the existence of market prices at which the total demands for goods are matched by the total supplies. Trading activities that might identify such prices by bringing agents together as potential buyers and sellers of a good are characteristically absent, however. Anyway, there is no money to pass from one to the other as ordinarily envisioned in buying and selling. Here a different approach to equilibrium -- what it should mean and how it may be achieved -- is offered as a constructive alternative. Agents operate in an economic environment where adjustments to holdings have been needed in the past, will be needed again in a changed future, and money is familiar for its role in facilitating that. Marginal utility provides relative values of goods for guidance in making incremental adjustments, and with money incorporated into utility and taken as num\`eraire, those values give money price thresholds at which an agent will be willing to buy or sell. Agents in pairs can then look at such individualized thresholds to see whether a trade of some amount of a good for some amount of money may be mutually advantageous in leading to higher levels of utility. Iterative bilateral trades in this most basic sense, if they keep bringing all goods and agents into play, are guaranteed in the limit to reach an equilibrium state in which the agents all agree on prices and, under those prices, have no interest in further adjusting their holdings. The results of computer simulations are provided to illustrate how this works

Who Gets What, When, How? Power, Organization, Markets, Money and the Allocation of Resources

Money is a mystery and financial institutions are often regarded as guardians and promoters of the mystery. These sketches are designed to help an individual interested in, but not technically trained in economics, understand markets, money, credit and the evolution of a mass market system embedded in the rich context of its political environment and society. The efficient functioning of a dynamic economy requires the presence of money and financial institutions. The great variety of financial institutions in any advanced economy requires that a synthetic approach is used to understand what the whole looks like. Verbal description provides an overarching view of the mixture of history, law, philosophy, social mores, and political structure that supplies the context for the functioning of the economy. This has been vividly illustrated by Adam Smith, his teacher the Reverend Francis Hutcheson and his close friend David Hume. There are two different but highly allied themes in this single slim volume. Chapters 1, 2, and 3 supply the rich context of history, society, polity and law in which every economy is embedded. Chapters 12 and 13 sketch what might lie ahead given the current state of the world. These chapters require no symbols or technical depth. In contrast Chapters 4 to 11 offers a reasonably nontechnical exposition of some of the considerable development in formal economic theory pertaining to money and financial institutions as economics struggles towards emerging as a science, balancing quantitative measures with qualifications that help to explain what the numbers mean

The Paradox of Competition: Power, Markets, and Money - Who Gets What, When, How?

Money is a mystery and financial institutions are often regarded as guardians and promoters of the mystery. These sketches are designed to help any reader interested in, but not technically trained in economics, understand markets, money, credit and the evolution of a mass market system set in the rich context of its political environment and society. We all want a good society. What is a good society is given by our joint vision, mutual respect and social concern but the implementation of the vision calls for the use and understanding of money, markets and finance. The efficient functioning of a dynamic economy calls for the presence of money and financial institutions. The great variety of financial institutions in any advanced economy requires an understanding of what the whole looks like. Verbal description provides an overarching view of the mixture of history, law, philosophy, custom, habit, and political structure that supplies the background for the functioning of the economy. This has been vividly illustrated by Adam Smith, his teacher the Reverend Francis Hutcheson and his close friend David Hume. There are two different but highly allied themes covered here. The first explains the worth of economic theory and its importance while connecting it with the world of politics in which the economy dwells. The second is the application of economic thought to the operating problems of every society. The first theme is covered in the first nine chapters. Chapters 1, 2, and 3 supply the rich context of history, society, polity and law in which every economy is embedded. These chapters require no symbols or technical depth to be understood. In contrast Chapters 4 to 9 offer a reasonably nontechnical exposition of some of the considerable development in formal economic theory pertaining to money and financial institutions as economics becomes more scientific, balancing quantitative measures with qualifications that help to explain what the numbers mean. The second theme is developed in Chapters 10-13 where economic theory with all of its abstractions has to be connected with social and political reality before it can be of use. This calls for both and understanding of physical and social facts, and an appreciation of the role of moral sentiment. Chapters 13 and 14 consider some alternative scenarios that we face in the near future