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Fiat Money and the Natural Scale of Government

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Abstract

The competitive market structure of a decentralized economy is converted into a self-policing system treating the bureaucracy and enforcement of the legal system endogenously. In particular we consider money systems as constructs to make agents' economic strategies predictable from knowledge of their preferences and endowments, and thus to support coordinated resource production and distribution from independent decision making. Diverse rule systems can accomplish this, and we construct minimal strategic market games representing government-issued fiat money and ideal commodity money as two cases. We endogenize the provision of money and rules for its use as productive activities within the society, and consider the problem of transition from generalist to specialist production of subsistence goods as one requiring economic coordination under the support of a money system to be solved. The scarce resource in a society is labor limited by its ability to coordinate (specifically, calling for the expenditure of time and effort on communication, computation, and control), which must be diverted from primary production either to maintain coordinated group activity, or to provide the institutional services supporting decentralized trade. Social optima are solutions in which the reduced costs of individual decision making against rules (relative to maintenance of coalitions) are larger than the costs of the institutions providing the rules, and in which the costs of the institutions are less than the gains from the trade they enable to take place.

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File URL: http://cowles.econ.yale.edu/P/cd/d15a/d1509.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1509.

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Length: 34 pages
Date of creation: Apr 2005
Date of revision:
Handle: RePEc:cwl:cwldpp:1509

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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Bureaucracy; Contract enforcement; Taxes; Money;

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References

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  1. Shubik, Martin & Smith, Eric, 2004. "The physics of time and dimension in the economics of financial control," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 340(4), pages 656-667.
  2. Martin Shubik, 2000. "The Theory of Money," Cowles Foundation Discussion Papers 1253, Cowles Foundation for Research in Economics, Yale University.
  3. Martin Shubik & David Eric Smith, 2004. "Strategic Freedom, Constraint, and Symmetry in One-period Markets with Cash and Credit Payment," Yale School of Management Working Papers ysm379, Yale School of Management.
  4. Thomas Quint & Martin Shubik, 2004. "Gold, Fiat and Credit. An Elementary Discussion of Commodity Money, Fiat Money and Credit, Part II," Cowles Foundation Discussion Papers 1460, Cowles Foundation for Research in Economics, Yale University.
  5. Per Bak & Simon F. Norrelykke & Martin Shubik, 2000. "Money and Goldstone modes," Papers cond-mat/0009287, arXiv.org, revised Sep 2000.
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Cited by:
  1. Juergen Huber & Martin Shubik & Shyam Sunder, 2011. "Financing of Public Goods through Taxation in a General Equilibrium Economy: Theory and Experimental Evidence," Cowles Foundation Discussion Papers 1830, Cowles Foundation for Research in Economics, Yale University.
  2. Ioannis Karatzas & Martin Shubik & William D. Sudderth, 2008. "Financial Control of a Competitive Economy without Randomness," Cowles Foundation Discussion Papers 1681, Cowles Foundation for Research in Economics, Yale University.

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