Julien Smith and I have been talking about how trust, reputation, and value in new media is essentially a barter economy in these posts here and here. So far, we’ve established:

- whuffie is essentially a non-tangible measure of reputation, goodwill, and trust
- whuffie fails the tests that determine what a currency is

Now, some of the problems of a barter economy include:

- issues with concurrency of wants
- issues with trust

Concurrency of wants is the biggest challenge to barter. If I have chickens and you have a cow, in order for trade to occur, you have to want chickens and I have to want a cow. If one of us doesn’t want what the other has to offer, the trade can’t happen, at least in bilateral trade.

Multilateral trade makes this somewhat easier. If I have chickens, you have a cow, and Joe has maple syrup, and you want chickens, but I don’t want a cow and I do want maple syrup, and Joe wants a cow, we can make it work.

Multilateral trade, however, is still relatively inefficient. In order for it to become more efficient, you need more trading partners. This is the function of a marketplace, a commons, where lots of people can bring their goods and services together and make multilateral trade work on a very large scale. The larger the marketplace, the more potential trades can occur.

The second major problem with barter is that there are trust issues. If I have chickens and you have a cow, and we a concurrency of wants, we still have to negotiate terms. I might say, well, my chickens are super chickens, so instead of 10 chickens for a cow, I will only trade 5 chickens for a cow. If you trust me, the trade will happen. If you don’t trust me, the trade will not happen. In a bilateral trade, this is manageable, but once you start doing multilateral trade, it can get VERY complex to manage all these trades and values. Imagine the sign in front of my stand at the marketplace: Chickens for sale. 5 chickens for a cow, 7 chickens for a horse, 1 chicken for 2 ducks, etc. Now try to keep track of all that at a hundred stands in a marketplace.

This is where money comes in. Money is a replacement, an intermediary for trust. I don’t have to trust someone in order to establish fairness of a trade. Money acts as a common medium of exchange. If I have chickens, and I claim they’re super chickens, and I want $10 per chicken, I set my price. You as the purchaser can then shop around at the marketplace. You might find a booth two stands down that has chickens which appear, for all intents and purposes, to be equal in quality to mine, and the price is $4 per chicken. Because you don’t have to manage computation in anything other than a single unit of currency, you can compare apples to apples - or in this case, chickens to chickens. The element of trust has been replaced by an objective measure, a metric, which you can use to manage your purchasing.

So, what in the WORLD does any of this have to do with new media? It has to do with whuffie and reputation. We as a human race started out relatively chaotic. As we got more organized, we evolved our economic systems from chaos to barter and trade to currency. New media is in a similar situation. It started out as complete anarchy, and is now beginning to organize. Julien’s blog post indicates that we’re roughly at the level of trade and barter in new media.

At the conclusion of my last blog post, I mentioned that current financial instruments cannot be used as metrics in a barter/trade economy because they’re not designed to work in that kind of environment. I mentioned that new media, if it remains a barter economy, will need tools and metrics designed for a barter economy.

Well, logic and history would suggest that it won’t. Logic and history suggest that, as has happened across cultures, continents, and races, barter and trade will evolve into currency. So we could try to shoehorn today’s financial management tools into a barter economy, or we could try to evolve the barter economy into currency. History suggests we’ll be much more likely to do the latter, or at least be more successful with the latter.

What would a currency economy of trust, reputation, and goodwill look like? Difficult to say, but it would need to address the concurrency of wants and issues of trust & valuation.

Concurrency of wants is actually relatively easy to solve, since just about everyone wants the same thing. Goodwill, trust, a good reputation in the community - these are all things that I’d argue most new media participants would fundamentally want. In that case, you have to worry less about a diversity of people to trade with, and more about the size and reach of your network. The more trading partners you have, the faster and more efficiently you can trade with them in the same commodity. Since the commodity isn’t based in scarcity, but rather in abundance, you can effectively create it at will. For example, I can create a minute amount of goodwill right now to John Wall, CC Chapman, Bryan Person, Nicolas Pin, and Julien Smith, simply by adding links to my blog.

Logically, therefore, the bigger the marketplace, the more successful I will be. This is essentially Metcalf’s law - the power of the network increases commensurate to the size of the network. This is one of the reasons MySpace, Facebook, and YouTube are premium new media properties - they’re the biggest marketplaces, the virtual marketplaces in which you can execute trades of whuffie.

Another key point is that these marketplaces facilitate trade very easily. MySpace, for all its deficiencies, makes it stupid easy to trade whuffie. Adding a comment to someone’s page, sending them IMs, sending out bulletins on their behalf - all these are tools for the generation of whuffie. Likewise on Facebook, you can easily write on someone else’s wall, create and tag them in photos, etc. YouTube makes it easy not only to share your own stuff within the marketplace, but also share it outside the marketplace, and share other people’s content in and out of the marketplace, which makes the creation of whuffie even easier. If your site is highly trafficked, you can generate a lot of goodwill in promoting someone else’s material.

The other issue with barter and trade that is addressed in currency is a unit of measure. How do you measure trust, value, or reputation? Well, we’ve already solved that - we solved that back in Web 1.0, when Amazon began to encourage user reviews, and eBay introduced ratings, which led to insightful comments like “A++++++++++++ seller!!!”. Uncreative though they might be, ratings systems provided a transparent method for accountability and trust. The only catch with new media is that each person, each web site, fundamentally acts as its own closed system. Trust and accountability on eBay does not exchange easily with trust on Amazon. In order for things to move efficiently, a common standard of trust would need to be created.

As new media and Web 2.0 continue to evolve, the social currency may actually make the transition from metaphor to reality. To be successful in new media, you and your web site will need to create a marketplace for goodwill that has both audience and simple tools for the creation of goodwill, and an accounting system that can display goodwill. When we have those tools, social currency will be a step closer to being a real currency.

Why would we want that? Simple. When you have functional currencies that are relatively stable, you can create currency exchange. Your personal reputation and social currency at that point can be indexed, managed, and traded like any other currency, be it a dollar, ruble, or Linden. Once we reach that point, the economics of new media will become MUCH easier, and if history is any lesson for the future, a great deal more profitable for everyone involved.