Failures in Economics: On The Origin of Money

If you ask an Economist, or consult any Economics text book, about the origin of money it’ll start something like “Imagine…” for some reason to do economics you have to do a lot of imagining “… a society that has no money…” [1].

Such a primitive society would have problems doing trade and would find it easier if they had a common medium of exchange. An economist called Menger, according to some, solved the problem of how the medium of exchange came about by arguing that there could be some commodity that is very ‘marketable’, meaning that for some reason people generally always want it, and so this commodity would naturally become a standard medium of exchange.

Mises wrote a paper called ‘The Theory of Money and Credit’. Note, not ‘A Theory’ or ‘The Von Mises Theory…’ or ‘The Commodity Theory…’, no, The Theory. This happens to be considered pretty much the basis of the Austrian School of Economic thought, which is the theoretical basis for the modern Libertarian movement in the US (and partially in the UK). This work builds on Mengers explanation for spontaneous money. Economists generally describe this as an explanation for “how money arrises”, which I always find an interesting choice of wording. Not how it arose, or how it can arise, or how it arose in sub-saharan Africa as apposed to Asia. How it arrises in some timeless and vague incontingent way. As if it is some purely abstract concept unconnected with time or space, you know, like how carbon bonds with oxygen during combustion.

As it happens I think these papers are pure fiction. I also think that this explanation for spontaneous money, if accurate, is intrinsically unstable for 2 reasons. The first reason is ecological. The marketability of any commodity is purely circumstantial. If everyone is using something as a medium exchange there is nothing in this model that says this will always be the case. One day someone might discover gold gives you cancer, for example. The second reason is more intrinsic. Once a commodity becomes a medium of exchange, people begin to want it for it’s own sake, once that is the case demand for it will drop (according to economic ‘Laws’). If salt were a medium of exchange, and everyone started hoarding it, everyone would have loads of salt everywhere. It seems that once a commodity becomes a medium of exchange it loses the economic properties that were required for it to be a good medium of exchange. For this model to work, everyone has to forget that salt is salt, but continue to want it as if it’s salt. To me that makes no sense.

It’s ironic that this is the basis of ‘sound money’ theories of metal. Libertarians are obsessed with gold yet the basis for their confidence is a model of pure circumstance and persistent self delusion [2]. This bares out when you think ‘What is gold for?”. Gold has become useful recently, we use it in electronics and engineering, but for most of history it has had literally no use except as coins. During the middle ages gold went out of circulation, ending up in churches, a detail many overlook. I assume the demand we are to believe accounts for gold’s marketability is that we like the look of it in jewelry. Again, purely circumstantial.

But actually, such theoretical objections to this model are essentially irrelevant because there is no evidence that this model fits reality, and plenty of evidence that it’s false, but that’s not the topic of this post per se.

After reading these two papers a couple of things stick out. Both papers make numerous empirical claims without offering any references. They’re simply asserted. They could have checked, but didn’t bother. One such claim:

“Economic history is the gradual extension of the economic community beyond its original limits of the household to embrace the nation and then the world” (von Mises, The Theory of Money and Credit, p. 33)

I realised that this sentence contains a fundamental mistake made by economists. It lies in the use of the word ‘household’. What is a household? It’s interesting to think about what the micro-economy inside of a household is. It actually could be any combination of communist or totalitarian, or even capitalist, if the parents are soulless monsters. For example, it’s perfectly natural for economists to wonder what the commercial benefit of a hunter hunting for food might be. And then making one up. On the other hand what commercial benefit does a parent seek to exploit when they go shopping for groceries or put a child to bed? Do family members barter? Perhaps sometimes. If a family member asked you for a pen would you think like a capitalist or like a communist? Would you even think about it?

As such economists seem to treat households as a handy and little black box. Whatever goes on inside it doesn’t count as part of the economy. The household is the single unit. It contains only a couple of people so you can think of it as an agent. But, what if a household contains the whole community?

Let’s go back to one of those hypothetical tribes. What if that community is run like a household? What if resources are distributed not through barter but through needs. What if the problem of medium of exchange simple doesn’t exist because there is no exchange?

[1] Actually, what they are asking you to imagine is a make-believe primitive society that has no money but populated with capitalists. Obviously they then conclude that the society will miraculously become a capitalist society.

[2] Unless, of course, they are arguing humans are genetically predisposed to wanting gold, which I assume they aren’t.

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