Potlatch vs Market Model of the Net

Roy.Davies (RDavies@exeter.ac.uk)
Fri, 2 Dec 1994 10:19:00 GMT

In last week's issue of _The Economist_ (26 November 1994 pages 25-30)
there is an article entitled _Electronic money: so much for the cashless
society_ which makes the claim that "the transformation of the Internet
from a huge virtual community into a huge virtual economy may herald
the age of electronic money - and with it, headaches for traditional
banks and regulators." The article refers to Internet as "that rare
thing, a vast market visibly hungry for a fairly well defined product."
It describes various experiments with forms of electronic payment and
discusses their possible long-term implications. Whether they agree
with these suggestions or not the article will probably be of interest
to anyone concerned with the future of the Internet.

At present far from being a market the Internet is a sophisticated
example of competitive gift exchange, rather like an electronic version
of the native American potlatch. This is a form of barter in which social
rather than economic considerations predominate. People who make useful
contributions to discussion lists, bulletin boards etc. derive personal
satisfaction and (in the case of prominent participants) prestige as a
result. They also know that they themselves are likely to find useful
information as a result of the activities of similarly motivated people.

The most famous example of competitive gift exchange was one with just
two participants (unlike the potlatch or the Internet!) - Solomon and
the Queen of Sheba. "Extravagant ostentation, the attempt to outdo each
other in the splendour of the exchanges, and above all, the obligations
of reciprocity, were just as typical in this celebrated encounter, though
at a fittingly princely level, as with the more mundane types of barter
in other parts of the world."

The quotation above comes from:

Davies, Glyn _A history of money from ancient times to
the present day._ Cardiff: University of Wales Press, 1994.
696 pages ISBN 0 7083 1246 2.

(At this point I should declare an interest - the author is my father).

Many existing users might think that the gift exchange model is the most
appropriate one for the Internet. It works quite well now, but whether
it will do so if the number of users continues its present rate of growth
for much longer is uncertain. In order to limit network congestion systems
of charging for use have been proposed and once that idea is accepted it
could, in turn, lead to a greater acceptance of the idea of the Internet
as an electronic market place.

The Economist article quotes Lee Stein, the Californian entrepreneur
behind First Virtual Holdings (which claims to be the world's first truly
electronic bank) as asserting that "unless the Internet embraces commerce,
it runs the risk of going the way of CB radio. If people aren't making
money, they won't add value and this won't work."

The implications of such a change would be likely to run far deeper than
their effects on information gathering. One of the points discussed in
the Economist article is whether digital cash should be a proxy for
money or whether it should be acceptable as money in its own right.
The latter would, according to the article, be unpopular with governments
who have always regulated banking activities carried out within their
countries. "If people who log on to the Internet are localised
geographically and thus subject to a particular set of national laws,
the traffic that they create on the Internet is not very obviously
anywhere at all." Looking further ahead the article suggests "ideally,
the ultimate e-cash will be a currency without a country..."

If digital cash does become a reality it is unlikely to remain a mere
proxy for real money indefinitely. In his _History of Money_ Glyn Davies
avers that "money can perform many functions in similar ways and similar
functions in many ways. As an institution money is almost infinitely
adaptable... Money designed for one specific function will easily take on
other jobs and come up smiling. Old money very readily functions in new
ways and new money in old ways: money is eminently fungible." Yet that
does not mean that new money cannot have profound new effects for he
points out that "once a new money habit is adopted... or an existing
monetary instrument is given extended use... a permanent lift is given to
the potential money supply, thus acting as a `financial ratchet', more
easily raised than reduced."

Paper money was originally simply a proxy for the real thing. British
banknotes still carry the phrase "I promise to pay the bearer on demand
the sum of x pounds" (where "x" is the denomination of the note) with the
signature of the chief cashier of the Bank of England underneath.
However, one unintended effect of the adoption of paper money was to make
hyperinflation possible (e.g. the Continentals of the American Revolution,
the Confederate banknotes of the US Civil War, and German notes after
World War I). China which invented paper money had abandoned it, before
its widespread adoption in the West, for that very reason.

The possible transformation of the Internet into an electronic marketplace
would be more than sufficient cause for concern and debate, but if the
experiments with digital cash prove successful the ramifications may
ultimately extend to all forms of economic activity and have profound
implications for the development of society in every country of the globe.

Roy Davies Telephone 0392 263884
The University Library FAX 0392 263871
University of Exeter
Stocker Road Internet Roy.Davies@exeter.ac.uk
Exeter EX4 4PT