While individuals have a common interest in specialization and maximizing the division of labor, there are still coordination problems that limit this expansion.

Firstly, it is important to note that since production processes are inherently time-bound and often asynchronous (non-simultaneous), there will usually be a time gap between an individual's initial contribution and the receipt of the counterpart. Committing to a specific task now without having prior assurance that others will meet our needs in the future can be risky.

In the division of labor, each party benefits from cooperation, but individually, one might be tempted to enjoy the work of others without reciprocating, as this way, they gain something valuable without incurring any cost. Such situations, where mutual collaboration results in suboptimal gains for individuals but maximum gains for the group, are described in game theory as the "prisoner's dilemma."

Originally, the prisoner's dilemma was formulated as follows: Two suspects, Alice and Bob, unable to communicate, are faced with the risk of imprisonment, with potential sentences as follows:

These outcomes can be represented in a matrix (numerical results indicate the number of years of imprisonment):

In this game, there is no opportunity for coordination (communication is impossible) to achieve the best outcome for both parties. Consequently, Alice and Bob have an individual incentive to accuse each other, even though it does not lead to the optimal outcome for the group. The optimal strategy for both is to remain silent, each receiving a 1-year sentence.

This game illustrates a problem frequently encountered in real life: in the absence of coordination mechanisms, individuals tend to choose strategies that maximize their individual gain, regardless of the strategies chosen by others (theft, cheating, betrayal, violence, etc.), even when a more desirable equilibrium through coordination/collaboration is possible.

This problem has less impact in small communities (e.g., family, friend circles) because, in such cases, everyone knows each other directly, making it possible to remember each other's contributions. Assuming that leaving the community (desertion) incurs a cost, a reputation system based on individual agents' memory is usually sufficient to avoid the pitfalls posed by the prisoner's dilemma.

However, when dealing with larger communities that benefit significantly from the division of labor, coordination problems reemerge. This is due to two main reasons:

First, humans are limited by their cognitive capacities. It is impossible for a person to maintain and remember stable social relationships with more than 150 individuals, making a reputation system insufficient to overcome the prisoner's dilemma at scale.

Second, socially accepted measurement of the value of contributions in exchange (commensurability) is a non-trivial problem. For example, if an individual provides meat from hunting and requests materials for shelter in return, how can the amount of meat offered be evaluated in terms equivalent to the requested materials? The same goes for quality – is deer meat worth more or less than wood?

Even if it were possible to establish a satisfactory exchange rate for each pair of goods, maintaining this information quickly becomes impractical. In a direct exchange system involving N goods, there are N(N-1)/2 exchange rates to remember. For an economy of 50 goods, that means remembering 50*49/2, or 1225 exchange rates, as opposed to just 50 in indirect exchanges. For an economy of 100 goods, this number increases to 4950. Such a quadratic relationship places an additional limit on the scalability of direct exchange (barter).

Moreover, since these exchanges don't occur instantly but are spaced over time, evaluating contributions over time further complicates the relative assessment of contributions. In addition to assessing the exchange ratio between two present goods, it becomes necessary to evaluate the value of a past contribution relative to a future counterpart.

Today, despite the impracticality of such a system, we could use writing or digital data storage to remember all this information and establish a credit system (keeping track of past contributions, including the exchange rate of those contributions, is essentially setting up a credit system).

In pre-civilization times, these technologies did not exist. Thus, our ancestors had to find other solutions to enjoy the benefits of the division of labor without exposing themselves to the negative consequences of the prisoner's dilemma. The solution to this problem of direct exchange was indirect exchange facilitated by money.

Money can be seen as the solution discovered by our ancestors to address what economists call the "double coincidence of wants" problem. This problem has three dimensions: spatial, temporal, and interpersonal.

In a direct exchange (barter) between Alice and Bob, they both need to possess something the other desires at the same time and place. By using indirect exchange, i.e., through money, Alice can buy from Bob, and Bob can use that monetary unit elsewhere, at another time, and with someone else (provided that the other person accepts that form of money).

For a good to serve as money, it must have a high salability, meaning it should be desired by as many people as possible, most of the time. By using a highly saleable good, the problem of double coincidence of wants is resolved in terms of spatial and interpersonal dimensions: if the good I use as money is desired everywhere and by most people, I can easily separate the act of selling from the act of buying in terms of location and social interaction.

However, the salability problem over time is more challenging to solve for two reasons:

First, entropy (commonly known as the "effect of time") gradually alters the qualities of most goods with direct utility. Therefore, preserving the salability of a good over time requires it to be highly durable or resistant to entropy.

Second, the relative scarcity of a good at time "t" does not guarantee its relative scarcity in the future. By dedicating enough resources to a specific area of production, humans can increase the supply of any good. The only limitation to increasing the production of a good is the associated opportunity cost. Consequently, the present relative scarcity of a good cannot guarantee its future relative scarcity. Only goods whose marginal production can be increased at very high costs can be consistently scarce, which is why this is a characteristic of freely emerged monetary goods throughout human history.

In pre-civilizational times, a variety of goods like seashells, crafted jewelry, necklaces, or beads served as money. These goods were easily transportable, had no direct utility beyond their ornamental value, resisted entropy (i.e., they did not deteriorate over time), were naturally scarce and/or required a significant amount of specialized labor to produce. Since the level of division of labor was low at the time, and therefore, the opportunity cost associated with producing ornamental artifacts was high, these items could not be produced in large quantities. Thus, those using these items as money could be assured of their future relative scarcity.

The fact that our hunter-gatherer ancestors engaged in these resource-intensive tasks, even though they generated no goods with direct utility, demonstrates the significant gains they expected from expanding the spatial, social, and temporal scope of exchange. If this were not the case, and it were more useful for them to employ these resources in shelter construction, hunting, or other activities, rather than the production of monetary goods, we would probably not find as much archaeological evidence of these artisanal activities. Other groups using their resources more efficiently would have enjoyed better development and greater prosperity, and these artisanal activities would have quickly disappeared in favor of activities producing goods with direct utility.

In this sense, the production of monetary goods, by promoting the expansion of the division of labor, represented a more profitable use of resources (in terms of subjective utility to individuals) than all other alternatives (increasing hunting, fishing, gathering, wood production, house construction, producing more hunting and fishing tools, etc.).

To conclude our analysis of the monetary institution, we need to address the issue of economic action in the context of the inevitable uncertainty about the future.

As Austrian economists have pointed out, human action is time-bound and always oriented toward the future. When an individual acts, they change their present condition in the hope of obtaining future satisfaction. This mental projection can be oriented toward the near or distant future, but for an individual to project into the long term, they must first secure their short-term sustenance because their condition in the near future directly affects their condition in the distant future.

This stems directly from human rationality; no one can ignore the sequential nature of temporal phenomena and the chronological dependence that results from it because it's one of the essential constraints of human life. Therefore, since the future always remains uncertain for humans, they will seek to secure their long-term survival only once their short-term survival is assured.

In this regard, money, by allowing the storage of value in the present and its transfer to one's future self, plays a crucial role in the intertemporal coordination of human action. By storing money, i.e., saving, individuals guard against future uncertainty and thus enable themselves to direct their actions toward longer time horizons. However, they can only achieve this if the money used constitutes a store of value, meaning it has salability over time, which, as previously mentioned, is a characteristic of durable and relatively scarce goods.

In the next chapter we will delve into the concept of time preference and explain the Austrian perspective on interest and capital, which will serve as basis for the following chapter about the Theory of the Business Cycle.