12 - MONEY AND THE DECENTRALIZATION OF EXCHANGE

Abstract

This chapter discusses money and the decentralization of exchange. Money provides a solution to the difficulty by allowing quid pro quo requirements to be fulfilled by a specialized good. The use of a specialized good has two implications. It reduces the coordination required to decide what good to use in settling up accounts to fulfill quid pro quo. This eliminates the over determinacy in the demand for other goods. A single specialized medium of exchange allows achievement of the equilibrium allocation in that good as an algebraic consequence of its achievement in the others. Trade is said to be decentralized if the decision on what goods to trade between two agents depends only on their own excess supplies and demands. If the trading decision depends on others' excess supplies and demands then this represents sufficient complexity that the process is thought to be centralized. Once the complex of excess demands and supplies can be represented as the sum of a finite number of primitive chains, it remains to show that each chain can have its demands fulfilled in a single sequence of trades. The trading procedure that achieves this requires sufficient information and coordination to allocate traders to chains and let them know what chains they have in common.