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Economic Theories of Money â and Their Critiques
1.1. BARTER, EXCHANGE AND MONEY
Whether one asks people in the street, consults academic textbooks, examines educational materials in economics or simply Googles it, the question âwhat is money?â almost always yields the same answer: money is a means of exchange, which facilitates trade. Looking a little further afield, one might identify other functions: its capacity to express prices, and thus make the values of different goods commensurable, or again its ability to store purchasing power and preserve value over time. These three functions â acting as means of exchange, a standard of value and a storehouse of purchasing power â appear to exhaust the essence of money for most theorists. âMoney is what money doesâ (Hicks 1967: 1) is a popular catchphrase among economists. In this way, they define money functionally, rather than substantially â at least at first sight. A substantial definition would be, for instance: âmoney is goldâ. But although â at certain times and in certain places â gold, usually weighed out or in the form of coinage, has served as money, this does not mean that gold is money. A glance at your wallet will probably reveal, apart from copper-or brass-coated coins, paper banknotes and various debit and credit cards. Throughout history, the most diverse objects, including salt, shells and cattle have all served as money.
And yet, particularly when considering the answers given by economists to the question of what money actually is, primacy is almost always given to its function as a means of exchange. Very often, its other (two) functions are derived from this initial function, the story being that, precisely because a particular âthingâ was used as a general means of exchange, prices were able to be expressed in terms of exchange relationships between this one thing and all other things and thus became commensurable. Furthermore, the story continues, it is thanks to this phenomenon that the generalised means of exchange (no matter what it consists in) is, or rather becomes, intrinsically valuable. Because there is no need to use it immediately, one can hold on to it until the next opportunity to exchange it for something arises. The attributes of money (at least money as we know it) â namely, being able to measure and store value â are thus mere by-products of its real function: to act as a means of exchange.
Although, on its own, such a definition gives us no real clue as to how money came into existence, it is often concluded from this definition â in an act of plainly circular reasoning â that money must have evolved from the exchange of goods and wares, vulgo barter. As early as the fourth century bce, Aristotle claimed that money was first invented in order to facilitate exchange, the idea being that money, as an intermediary good between different traded goods â into which a trader could convert excess wares and then use again later to purchase other goods â enabled a greater number of people to satisfy their needs than would be possible with bartering (Aristotle 1990: I, 9).1 However, Aristotle also cautioned against accumulating money for its own sake, considering this to be a misuse of money.
Around 2,000 years later, in the works of John Locke, money continues to appear first and foremost as a facilitator of exchange; only now â in a very significant change â it is moneyâs capacity to be exchanged for anything and everything that justifies peopleâs accumulating more of it than they need (Locke 1689/2003: 133â46; Priddat 2012). But the real locus classicus of historical (or genetic) exchange theories of money is Adam Smithâs Wealth of Nations, published in 1776, which is considered to be the founding text of the modern economic sciences:
But when the division of labour first began to take place, this power of exchanging must frequently have been very much clogged and embarrassed in its operations. One man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less. The former consequently would be glad to dispose of, and the latter to purchase, a part of this superfluity. But if this latter should chance to have nothing that the former stands in need of, no exchange can be made between them. [âŠ] In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry. Many different commodities, it is probable, were successively both thought of and employed for this purpose. [âŠ] In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity. Metals can not only be kept with as little loss as any other commodity, scarce anything being less perishable than they are, but they can likewise, without any loss, be divided into any number of parts, as by fusion those parts can easily be reunited again. (Smith 1776/1904: 24â5)
As further stages in the development of money, Smith identifies the standardisation of certain quantities of metal and their subsequent minting into coins. He makes no mention of government-issued banknotes, which at that time had already been in use in England for three-quarters of a century (Hutter 1993). In the meantime, this origin myth of money has found its way into almost all economics textbooks.
It is well known that Smithâs book was also a normative text, aimed at criticising mercantilist trade restrictions. Of course, contemporary economics is hardly objective either (neither, it goes without saying, is this book), at least not insofar as its representations of the economy and, beyond that, of society present themselves as revealing the ânatureâ of things, especially human nature. âOrthodoxâ â meaning liberal-neoclassical â economics, and with it wider rational choice theory in the social sciences, assumes that exchange relationships between isolated, self-interested individuals constitute the ânaturalâ social order: societyâs original and natural state. Smith (1776/1904: 15) himself refers to âa certain propensity in human nature [âŠ] to truck, barter, and exchange one thing for anotherâ. âIt is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interestâ (Smith 1776/1904: 16). Paul Samuelson (1951: 53), winner of the 1973 Nobel Prize in Economics, seconds this view with non-ironic exaggeration: âa great debt of gratitude is owed to the first two ape men who suddenly perceived that each could be made better off by giving up some of one good in exchange for some of anotherâ.2
According to such pseudo-anthropology, the market â or rather a sort of âshadow marketâ â in which individuals relate to one another as if they were in a market, even though what they want to trade does not yet have a price, has always existed. And money is, supposedly, precisely that invention which all ârationalâ actors would, sooner or later, recognise as making the shadow market and the dyadic, random and (for third parties) invisible exchange relations visible. Exchange in general, meaning the exchange of one good for another, has on this view always existed, merely becoming easier when one no longer requires a particular good desired by the other party and instead can simply offer money. At the same time, trade became more âeconomicalâ, because now, thanks to the existence of an equivalising standard of value, all the prices of all goods can be compared and the best âdealâ found. Money, therefore, resolves what William Jevons called the problem of the âdouble coincidence of wantsâ: an actor, âEgoâ, must find a partner to exchange with, âAlterâ, who not only is offering what Ego wants, but also happens to want what Ego himself has to offer, and both of them must not only possess the âcorrectâ goods but also the âcorrectâ quantities of them.
Carl Mengerâs (1882) elaboration of this exchange theory of value retains a certain canonical status and continues to be used in essentially unchanged form by orthodox circles today. Menger assumes purely individualistic ownership relations and (commodity) exchange as self-evident and universal, but thinks them to be so cumbersome without money as to make inevitable the evolution of the âmoneyâ medium out of the most exchangeable commodity, via precious metals to gradual standardisation before ultimately becoming a practically valueless yet perfectly value-representing symbol. In this story, the state, or any other force external to the market, only ever enters into the picture after the invention of money, if at all. Money is the âspontaneous resultâ (Menger 1882: 250) of market participantsâ interactions.
The problem with this story is that it is both conceptually and empirically wrong. Even the simple fact that small markets with a limited range of goods and participants would need no intermediary good because the problem of the double coincidence of desires could be resolved by simply keeping tabs already discredits Mengerâs assumptions about moneyâs origins from humble village exchange. By contrast, in large, complex markets it would be practically impossible to find a single most exchangeable commodity, because between even a mere hundred different goods there are already 4,950 possible exchange relations. Believing that under these conditions one good would, without coercion, rise above all others to become money is extremely implausible.
Moreover, neither history nor anthropology know of any societies based on non-monetary commodity exchange. Of course âprimitiveâ and prehistorical societies always have (had) some form of goods exchange, but this always existed within narrow bounds (Dalton 1982; Humphrey 1985). This is especially true of hunter-gatherer societies and thus of the form of society dominant for the longest period of humanityâs existence so far. The ânatural societyâ, if it ever existed, was not a society of grocers and goods-peddlers. Nor did the development of agriculture and even the rise of cities automatically make markets the primary means for people to satisfy their needs or for societies to resolve their problems of social coordination and social reproduction.
As I will discuss in greater depth in Chapter 2, goods exchange in non-market societies is primarily an exchange of ceremonial goods. The fact that they are gifts, rather than commodities, does not mean they have no value. Gifts, too, involve reciprocity; they are just not traded for each other. Gift exchange does not mainly serve the acquisition of goods that one would otherwise be lacking, but rather the construction and confirmation of (social) relations, as well as competition for status. Where everyday goods â whether âconsumer goodâ, such as a millet beer, or âinvestment goodsâ, such as seeds â change hands, this is by and large not the result of a payment, but rather takes the form of a loan or simple gift. These communities are, of course, by no means automatically â and, in actual fact, rarely â communities of equals. Far from communist paradises, they are beset by intense rivalries and inequalities of wealth. Debt can â and, particularly in such social orders, does â lead to dependency and bondage. The point is that commodity exchange in non-market societies does not serve to avoid dependencies, but rather to create them. Moreover, small communities have little need for quid pro quo trade, as every person was (or is) a member of a larger household, and most households are autarkic, meaning they produce mostly the same things as others. Exchanging these manufactured goods would be economically pointless.
Historically, trade makes its first appearance at the fringes of society.The most logical partners for exchange were outsiders, not just because they may have possessed rare or intriguing objects, but also, and especially, because it is better to trade than to fight, particularly if another group is potentially stronger than oneâs own. Trade as a form of exchange between different groups serves as a substitute for violent conflict (LĂ©vi-Strauss 1943). And because such trade remains a dangerous affair â a trade exchange with strangers could well turn out to be a ruse â it is subject to special codes and rules, such as limiting access to the marketplace to particular persons, forbidding the carrying of weapons there, nominating dispute-arbiters and establishing standard units of measurement. This presupposes a pre-existing political order, in the wider sense.
From such external trade, means of exchange and payment could very well have evolved, and gradually come to be used within the societies whose external relations they served to facilitate (Polanyi 1957: 243â70; Polanyi 1963: 30â45). But this is a very different evolutionary pathway from the one described in the myth of primordial exchange. The presumed quasi-inevitable evolution of money â as all âsensibleâ individuals realise just how difficult exchange would remain without it â and the subsequent experimentation with money as a means of exchange, starting with relatively homogenous and quantifiable goods such as salt, before moving on to precious metals and then coinage and printed notes and other symbolic forms: this simply never happened. This does not mean that money, once introduced, does not then become a means of exchange. But it does mean that moneyâs origins lie in something other than its exchange function, with which orthodox economics is ontologically and historiographically obsessed.
Why, then, despite being so patently false, is this myth so tenacious? At least three reasons can be identified. First, it plainly favours the present economic order. Rather than illuminating the past, this tale serves to reinforce the status quo by making us believe that autonomous self-serving individuals, the institution of private property and the marketplace itself have always existed. But all three, like money, have real histories, rather than being simply given. To naturalise them means to legitimise them and declare them beyond question and not subject to debate. To take money to be a spontaneous discovery by homines economici in an initially moneyless marketplace naturalises money itself, such that it appears to be a primordial and essentially apolitical medium that only subsequently is captured and controlled by the state and other collective actors. It is clear that rulers and governments have repeatedly throughout history used control over the money system to advance their particular interests. But from this it does not follow that there ever has been, or could be, anything like a âneutralâ or âpolitically independentâ form of money, whose initial purity was corrupted by government capture (see Section 4.4). The myth of an initially politically neutral form of money, of course, does not have to be a deliberate falsehood. The fact that Aristotle, who was openly hostile to money making, advances such an account suggests that it can hardly be a self-serving invention of modern elites. But of course, why should proponents of liberal economics bother to lay bare a fallacy that happens to serve their own normative predilections so well?
Second, just as in the realm of technological progress, path dependency shapes the academic advancement of knowledge. Decisions and fundamental assumptions, once made, are hard to revise, especially when, as with contemporary economics, entire canonical frameworks of theory have been built upon them. As the study of the history of science shows, even in the natural sciences advances in knowledge are not the result of incremental gains in knowledge, but rather of the systematisation of singular observations and explanations into so-called paradigms (Kuhn 1969). A scientific paradigm is akin to a grammar that regulates what is sayable and thinkable. Whatever fails to fit this framework or cannot be reconciled with it is declared an exception or an aberration, or perhaps not even acknowledged. Only when findings that contradict the basic assumptions underlying a paradigm gain the upper hand, or non-scientific factors make the reconsideration of a particular scientific worldview more likely, can a new paradigm replace the old one. Orthodox or neoclassical economics3 is, to speak plainly, an a-social theory of how isolated individuals rationalistically â meaning always opportunistically and self-servingly â pursue gains from exchange. In such a paradigm there is no room for the institution of money, as some of its more honest exponents have even admitted (cf. Hahn 1982: 1). To challenge economic orthodoxy by conceptualising our economy â that is, the modern capitalist one â not as a market economy, but rather as a monetary economy, would be awkward and hardly ârationalâ for most economists.
Yet even liberal-normative intellectual bias â combined with the sheer epistemological gravity of the orthodox paradigm â cannot fully explain the social persistence of the âmyth of money as a means of exchangeâ. It is likely that its wide currency, as it were, also stems from our own everyday experiences and understanding of money. Most people associate money with the physical coins and banknotes in their pockets, notwithstanding the fact that most Western people own more than one payment card or the fact that most money is no longer held as physical cash, but rather exists only non-materially in the form of term deposits or other accounting units.4 A handwritten account entry or a piece of binary code stored on electronic hardware is less evidently a means of exchange than cash is. And even cash â i.e. paper banknotes and coins made of cheap metal â does not strictly speaking have material value, merely representing value through monetary information.
But is money, then, a means of exchange at all? Or more fundamentally: does money need to have value in order to facilitate exchange? Our everyday wisdom would say âyesâ. In our imagination, money appears as something with substance â not just a symbol, but the literal embodiment of wealth. If this reasoning is correct, thinking of money first and foremost ...