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What Google+ can tell us about changing money

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googleplusThe launch of Google+, Google’s latest attempt to make its own social networking site in the Facebook, has got me thinking about the value of networks in economics. One of Google+’s main challenges is going to be convincing people to using it instead of Facebook or Twitter. All my friends are on Facebook. Indeed, virtually everyone under forty in the Western world is.

But Facebook, technically, is quite a poor product. Shoddy privacy settings, spam messages inviting me to use applications I don’t want, event invitations from people I’ve barely met and friend requests from people I don’t know are all daily irritants. But Facebook still has an enormous amount of value for me because of the size of its network. The people I want to talk to and read about are on it, and that’s valuable to me. So, even if Google+ offers a superior product that is simpler, cleaner, faster and better than Facebook, it still lacks the network that Facebook has.

What does this have to do with monetary economics? At a lecture in the US I was at last week, the Free Banking School economist George Selgin emphasised the strength of networks in keeping people using a single currency, even if technically superior alternatives exist. Once something has risen to become the universal medium of exchange, it's difficult for that to change. If you oppose the government’s monopoly over money, as I do, this has big implications.

People use the pound sterling in the UK as the universal medium of exchange. The network strength of the pound is enormous: I accept pounds as payment for debts because I know that everybody else will, too. But the pound is very low quality – not only does it have no “real” value from a commodity backing, it loses 2-5% of its value every year through inflation. It’s the Facebook of voluntary exchange: buggy, annoying, and everywhere.

Most money used nowadays started off as a gold-backed currency; a link that was eventually broken. These now-fiat currencies were upheld by legal tender laws – the threat of force to make people to accept pounds as payment for goods and services.

I’d like an alternative – currency competition (like that outlined by Hayek in The Denationalization of Money) that allows people to use any money they like, so that the market could determine whether a currency backed by gold, or silver, or a basket of goods, or something nobody’s thought of yet could emerge. (Bitcoin is an interesting case here.) But I worry that, even if some wise government removed legal tender laws and the other restrictions on currency competition, the pound’s network size would let it keep its position as the universal medium of exchange, inflation or no.

That’s why Google+ is so interesting. Will people shift from a bad but ubiquitous network to a better but limited one? I was reminded of a previous example by Mitch LeClaire, MySpace. MySpace was once the centre of the internet. It’s now a sad, empty wasteland. Being a first-mover to a new network is difficult but, if it’s enough of an improvement and people can make the move freely, it may be possible.