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Show me the real money: Three monetary myths that need busting

January 13, 2015

Show me the real money: Three monetary myths that need busting

Money pervades our everyday economic interactions. But, despite its importance, it is also pervasively misunderstood. Here are three common monetary myths – frequently perpetuated by economists – that need challenging.

Myth 1: Money emerges from barter
Economists often tell a tale about how old communities first used barter to exchange goods and services. Bartering throws up tricky situations. Take as an example a farmer trying to exchange a cow for bread from a baker, a clumsy and difficult negotiation. Thus, according the old economists like Adam Smith, money was supposedly ‘invented’ as a way to get around that inefficiency and confusion.
This narrative is ahistorical and inaccurate. Anthropologists have long had a much more convincing account: in small communities without money, exchange does not take place through on-the-spot barter. Rather it takes place through reciprocity, the process whereby I give you something now, and then you return the favour over time. In essence, communities develop elaborate systems of score-keeping – informal ‘mutual credit’ systems are created, and if I don’t eventually honour my obligations under that system, I will be shunned from the community.
It is these ‘I owe you one’ systems that are behind the origins of money. Money is an abstracted form of such credit, taken out of the interpersonal context of a small community, and formalised and legalised within a political system.

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