Consider an economy where any two goods have some relative value. For example, assume that my neighbors’ houses are more or less similar. If we ask our neighbors how many goats they would want in exchange for their house, we would get varying answers from which we could calculate, roughly, how many goats a house is “worth” in the neighborhood economy. Or how many m&m’s a chicken is worth, and so on, listing all pairs of goods in the economy. If one has this list he can get whatever he needs if he has enough of some good that people want. He can plan how much of his good to make so that he can live the lifestyle he wants and support his children, etc. So this is a functional economy, the “barter economy”.
My question is: how do we transition from the barter economy to the money economy? We presume that the money economy simply “represents” the barter economy. To see what I mean, suppose that some coin is the money of a money economy. Mathematically, our expectation is that if a house is worth x goats in the barter economy and goats are worth y coins in the money economy, then a house is worth xy coins. But if we are in a barter economy this may not be the case. Perhaps in the original barter economy, a house is worth x goats and goats are worth y coins, but a house is worth z coins where z bears no relationship to x and y!
Money imposes a remarkable structure on human economic interaction. It imposes a single universal standard against which every good can be measured, and from which the relative worth of any pair of goods can be determined. Mathematically it is not at all clear that such a structure can be imposed on an economy. But it is imposed across the world. How does it happen, and why?