A day late, but whatever.
It's easy to understand how money might get started. A non-smoker accepts cigarettes(pdf) he doesn't want in exchange for the jam he doesn't want. Then finds a smoker who will accept those cigarettes in exchange for biscuits he does want. That non-smoker has just used cigarettes as a medium of exchange -- as money -- to get around the problem of a double-coincidence of wants. And once the ball starts rolling, it can snowball, because there's now one extra person who accepts cigarettes in exchange for other goods, which makes other non-smokers more willing to accept them, because they can exchange them with the first person, which makes cigarettes a more liquid asset, and so better as money. And so on.
Understanding how telephones might get started is a bit harder. What idiot would buy the first telephone, when there's no-one else to call? You need two individuals to coordinate to buy two telephones together, so they can call each other, to get the ball rolling. Or some sort of organisation of two or more people who need to call each other. And Azuth tells me this is how it got started:
Understanding how Halloween Trick-or-Treating might get started is harder still. Kids won't go out trick-or-treating if householders don't put out candy, and householders won't put out candy if kids don't go out trick-or-treating. So which came first, the chicken or the egg candy or the kids? And you need several kids, and several households, to make it all worthwhile. Jameson Tucker tells me how it got started in Australia:
There's a lesson here. If you want to fully explain some social institution it is not enough to explain the benefits to individuals of participating in an institution that currently exists. (And whether it benefits each individually to participate is not the same as whether it benefits all to participate, because there might be Prisoners' Dilemma institutions that are individually rational but collectively harmful). It's not even enough to explain the network effects that cause the institution to expand once it gets started. We need to think about how they get started. Some good institutions might find it difficult to get started. Some bad institutions might find it easy to get started.
(And understanding how cigarette money got started is easier than understanding how Bitcoin got started. Because at least cigarettes are valuable to smokers, even if not used as money.)
Assuming you haven't seen it , this may be a useful read re Bitcoin https://blog.chain.com/a-letter-to-jamie-dimon-de89d417cb80
Posted by: Steve | November 01, 2017 at 01:33 PM
Steve: I hadn't read it. Looks useful, but I didn't see anything on this question, from a quick skim. But I did read some other article (I've forgotten where) that was specifically on the question of how Bitcoin got started. And I don't mean the techie stuff about writing computer code, or about how it will be such a great thing now it has gotten started. I mean about how an intrinsically worthless object (like scraps of paper, or computer digits) can first get traded at a positive price. Getting the ball rolling. It referenced Mises Regression theory, IIRC.
Posted by: Nick Rowe | November 01, 2017 at 01:55 PM
"Mises Regression theory..."
But this requires *something* of non-money value back at the start of the chain.
Posted by: Gene Callahan | November 01, 2017 at 02:45 PM
Gene: exactly. Mises regression theory explains how a money that starts out as intrinsically valuable, then convertible into something intrinsically valuable, can keep going even after the promise of convertibility fades away. But that doesn't seem to apply to Bitcoin. So how can Bitcoin get started? And the article/post I'm remembering talked about Mises, and then tried to figure out how Bitcoin could get started. Not sure it was 100% convincing as an explanation, but it at least got the question right and recognised the problem.
Posted by: Nick Rowe | November 01, 2017 at 02:59 PM
Alexander Graham Bell, as befit a genius, took it on himself to install 2 telephones in his lab for his first call. And in Canada, the first two were between the offices of the Prime Minister and the Governor General who, at that time, mattered.
Posted by: Jacques René Giguère | November 01, 2017 at 03:31 PM
Jacques Rene: perfect!
Posted by: Nick Rowe | November 01, 2017 at 04:22 PM
"We need to think about how they get started"
In the case of crypto currencies, as a scam that targets desperate, wannabe, gullible libertarians.
And that "mining" requires computer sophistication doesn't mean that the basic idea isn't a Ponzi scheme.
As the letter to Dimon says:
(If Bitcoin is capitalism distilled, it’s also a kind of freedom distilled. Which is why libertarians can get a bit obsessed.)
Posted by: JKH | November 01, 2017 at 04:45 PM
JKH: I agree there does seem to be a bit of hype around Bitcoin. And it is a Ponzi (but as you know, my view is that some Ponzis are sustainable, if the asset is liquid enough (maybe Bitcoin?) or safe enough (doesn't sound plausible for Bitcoin). But you still need to get them off the ground somehow.
Posted by: Nick Rowe | November 01, 2017 at 05:10 PM
My guess would be that because of Halloweens dark side, it involved kids going around doing pranks. Some people learned to bribe them with candy so their houses would be protected from the pranks. Curiously, the prank part of Halloween seems to be mostly gone.
Posted by: Tiago | November 01, 2017 at 06:51 PM
Nick,
In the Catholic religion All Saints Day is the day after halloween. Halloween is the Eve of All Hallows.
http://www.catholic.org/saints/allsaints/
"The holy day was eventually established on November 1 by Pope Gregory III in the mid-eighth century as a day dedicated to the saints and their relics. The May 13 celebration was subsequently abandoned."
http://www.history.com/topics/halloween/history-of-trick-or-treating
"Poor people would visit the houses of wealthier families and receive pastries called soul cakes in exchange for a promise to pray for the souls of the homeowners’ dead relatives. Known as souling, the practice was later taken up by children, who would go from door to door asking for gifts such as food, money and ale."
"In Scotland and Ireland, young people took part in a tradition called guising, dressing up in costume and accepting offerings from various households. Rather than pledging to pray for the dead, they would sing a song, recite a poem, tell a joke or perform another sort of trick before collecting their treat, which typically consisted of fruit, nuts or coins."
Posted by: Frank Restly | November 01, 2017 at 07:10 PM
International travel started bitcoin and likely will dominate bitcoin.
It was, from the very start, a very simple FX trading platform, useful enough for international travel where the vendors live in the space between central banks. More than likely bitcoin and its derivative block chain system will occupy the travel niche. And we can see this happening when travel agencies are the first to price in bitcoin. The travel industry is not trade in FX holder, they want quick conversion and volatility is less important.
Posted by: Matthew Young | November 02, 2017 at 10:38 AM