What is money? Why does it exist? In the last post, I talked about ownership, and proposed that it can occur in the absence of money. So if money isn’t necessary for anyone to lay claim to their resource of choice, how come we’ve settled on that system?

Human beings, I propose, come with an inbuilt currency system of sorts that has nothing to do with money. It requires no physical units, works brilliantly, and is far more flexible and sophisticated than money will ever be. That system is what you might think of as ‘validation tokens’. These are the neurotransmitter payoffs that we receive for matching patterns we perceive in the world that imply that we’re good or useful people.

We’re designed as social animals to seek out interpersonal reward. Any act of charity you make, any sporting achievement you attain, or useful object you build, all result in validation experiences. These are the things we do because it makes us feel good. And while human societies are small, this kind of currency is all you need.

However, something happens when human societies get larger than simple tribes. A tribe that doesn’t exist in isolation is likely to have limits on its territory. That means there will be certain resources that it can access more easily than others. This creates the incentives for warfare and trade.

When human social groups trade, some notion of the equivalence of goods needs to be established, even in the simplest barter transaction. Repeat trades establish consistency in that equivalence. Faster, more complex patterns of trade naturally produce units of equivalence, and so money appears. Once your society has reached the scales of hundreds of thousands of individuals, I’d suggest that some retained unit of value-equivalence is going to be hard to avoid.

That unit of equivalence is going to code explicitly for just one thing: the perceived fitness gain that each given commodity confers. Tribe A needs beans because they’re hungry. They’re prepared to give away pots because they have more than they need. Tribe B feels differently—they need somewhere to put all their beans. And so a transfer of resources can happen. Because of how money arises, it can’t really represent anything except fitness-gain. (Note: I’m using fitness in the evolutionary sense here, as in biological advantage. I’m not talking about workouts.)

There’s another reason why money arises. At large social scales, our validation system starts to break down. It only works when the people we’re sharing experiences with are personally relevant to us, and who we’re likely to meet again. We only have modeling room for about a hundred and fifty people in our brains, so when we’re interacting with strangers, some other measure has to suffice. Units of anonymous trade are the natural replacement.

But something interesting happens along the way to more sophisticated societies. Rather than trade happening at the group-level between validation-based tribes, complex societies have individuals engaging in patterns of trade and mutual validation that happen in parallel. The tribes have all dissolved into a social soup, leaving only interlocking social networks. That means trade now occurs between individuals, just like kindness. Correspondingly, the burden of extrinsic fitness comparison happens at the level of every member of our society.

That isn’t going to be fun, for the most part, because evolutionary fitness is inherently comparative. Even though the amount of money in a society can rise and fall because of changes in perceived need and the arbitrary nature of the units, the psychological implications can’t operate that way. Money is always going to be about oneupmanship and stress, because the brain naturally conflates the units of fitness-gain we happen to be holding with our own biological fitness.

What this means is that the only way to enjoy thinking about money is to imagine a subjective equivalence between the number of units you have, and the number that everyone around you has. But nobody can see those units, so you have to signal the number that you’re holding by taking out resource locks on ever larger social resources. You have to own things. (If you’re wondering what I mean by resource locks, take a look at yesterday’s post.)

What this means is that in large complex societies, in order to feel okay about themselves, a large number of people are going to attempt to optimize over their notions of personal equivalence. They’re going to try to lock down more and more resources, even if they can’t use them, because the alternative is personal distress.

They’re going to concoct schemes in which they notionally own resources that they never set eyes on. Even if someone is holding more units than they can count or comprehend, notionally reducing that imaginary pile can cause panic. However much you’re holding ends up coding for how good you feel about yourself. To our kludgy primate minds, having less units means we’re less good, regardless of how many units we actually have. That is, unless we exercise the cognitive effort to see just how ridiculous that parallel is.

For large, complex societies, noise and historical accident are invariably going to have a greater impact on the number of trade-units an individual ends up with than their fitness. That math is very simple. But it flies in the face of what we want to believe about ourselves, so the math isn’t invoked. The irony here is that people are designed to be cashless tribe-members, not solitary bean-hoarders. No number of individually held units is healthy or good. At some level, just having a surplus of un-utilized trade-units implies that an individual is doing something other than being reproductively fit. It’s a fascinating glimpse of psychological ill-health that we collectively choose to ignore.

When the exterior balancing pressures on a large society go away, the interior pressure of fitness-panic dominates. More and more of the society’s trade-units will be caught up in dead peacock-tails of interpersonal display. That means less and less units are available for trade, and that means that the transfer of goods becomes steadily less efficient. This process generally goes on until the society incurs an environmental shock of some kind. When that happens, the imaginary peacock tails usually disappear and everyone becomes ‘poor’. Society rebalances itself as necessary—usually not pleasantly.

Money, then, is a curious compromise that enables large societies to form and self-balance. It is simple, robust, and generates momentum for its own self-propagation. But like any such mechanism, it is flawed, and prone to the perils of self-organized criticality. Can we do better? Can we use our intelligence and human agency to come up with a system that’s smarter and less prone to catastrophic error? I don’t know. But if you have opinions, I’d like to hear them.

(Note: I now have two actual real posts in my author blog! Amazing!)