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Commodity Money and the Valuation of Trade

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Author Info
Eric Smith (Sante Fe Institute)
Martin Shubik () (Cowles Foundation, Yale University)

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Abstract

In a previous essay we modeled the enforcement of contract, and through it the provision of money and markets, as a production function within the society, the scale of which is optimized endogenously by labor allocation away from primary production of goods. Government and a central bank provided fiat money and enforced repayment of loans, giving fiat a predictable value in trade, and also rationalizing the allocation of labor to government service, in return for a fiat salary. Here, for comparison, we consider the same trade problem without government or fiat money, using instead a durable good (gold) as a commodity money between the time it is produced and the time it is removed by manufacture to yield utilitarian services. We compare the monetary value of the two money systems themselves, by introducing a natural money-metric social welfare function. Because labor allocation both to production and potentially to government of the economy is endogenous, the only constraint in the society is its population, so that the natural money-metric is labor. Money systems, whether fiat or commodity, are valued in units of the labor that would produce an equivalent utility gain among competitive equilibria, if it were added to the primary production capacity of the society.

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File URL: http://cowles.econ.yale.edu/P/cd/d15a/d1510.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1510.

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Length: 18 pages
Date of creation: Apr 2005
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Handle: RePEc:cwl:cwldpp:1510

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

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Related research
Keywords: Bureaucracy; Contract enforcement; Taxes; Money;

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Find related papers by JEL classification:
C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
D5 - Microeconomics - - General Equilibrium and Disequilibrium
H5 - Public Economics - - National Government Expenditures and Related Policies
K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Eric Smith & Martin Shubik, 2005. "Strategic freedom, constraint, and symmetry in one-period markets with cash and credit payment," Economic Theory, Springer, vol. 25(3), pages 513-551, 04. [Downloadable!] (restricted)
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  2. Martin Shubik, 2000. "The Theory of Money," Cowles Foundation Discussion Papers 1253, Cowles Foundation, Yale University. [Downloadable!]
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