Exact understanding of money

Menger (1883: 35–36) makes a distinction between concrete phenomena and em- pirical forms. Concrete phenomena and their concrete relationships are specific to time and place. For example, the coins and banknotes in your pocket are examples of concrete phenomena. Empirical forms, on the other hand, represent the general aspects of phenomena. What we know as money, supply, demand, price, etc. in economics may be considered as empirical forms in Menger’s terminology. They do not denote the properties of phenomena that are specific to time and place; rather, they signify some general aspects of them. For example, while specific characters, pictures and colours printed on a 100 euro banknote, as well as its several uses may be counted as its properties, only the properties that are common to several forms of money can be counted as properties of ‘money’ (e.g. being a medium of exchange, a means of payment, etc.).19 Menger (1883: 36) argues that it is the ‘investigation of types and typical relationships’ that gives us deeper understanding of the real world.

One way to understand a concrete phenomenon is to study its properties and its relationship with other phenomena. According to Menger, such an under- standing would constitute individual knowledge of that phenomenon and history and statistics provide such individual (as opposed to general) knowledge about concrete phenomena. General knowledge of phenomena can only be attained theoretically by studying empirical forms and laws. Thus, according to Menger (1883: 43–45), there are two ways of understanding phenomena: the historical way and the theoretical way. Menger maintains that both of them are necessary for understanding phenomena.20 Obviously, the evidence presented by the an- thropologists (and historians) provides a historical understanding of the origin of particular exemplifications of ‘money’. Menger’s exposition of the origin of money, on the other hand, is supposed to provide a theoretical understanding of it. Menger says:

we become aware of the basis of the existence and peculiarity of a concrete phenomenon by learning to recognize in it merely the exemplification of a conformity-to-law of phenomena in general.

(Menger 1883: 45)

That is, we can interpret Menger’s explanation as providing some sort of a general law about economic phenomena such as the following: under the conditions of market-dependent direct exchange, self-interested economising individuals would be inclined to use more saleable goods as a medium of their exchange and upon the implementation of this idea by some individuals others will follow – hence the emergence of a medium of exchange.

The problem here is that the historical understanding of the origin of money seems to be in conflict with this theoretical ‘knowledge’. Anthropologists and historians exhibit many exceptions to this ‘law’, and since laws are usually con- ceived as being exceptionless, it may be doubted whether Menger accomplishes what he is supposed to. The answer lies in Menger’s conception of laws. Briefly, for the science of economics, Menger is generally talking about exact laws that cannot be tested by empirical reality and historical records.

But what are exact laws? According to Menger (1883: 50) there are two types of laws with respect to their strictness: laws of nature and exact laws that hold with no exceptions; and empirical laws that allow exceptions.

There are two different types of laws that have no exceptions: laws of nature and exact laws. According to Menger (1883: 59), ‘the laws of theoretical econom- ics are really never laws of nature in the true meaning of the word’. That is, laws of theoretical economics are exact laws.21 Exact laws cannot be tested and they state strict relationships among phenomena in isolation from other factors. Exact laws can only be true for the abstract world created by the researcher. Although the consideration of Menger’s explanation as providing exact laws avoids objec- tions that refer to particular facts, a more serious problem arises: if Menger is talking about an abstractly conceived world, and if we cannot test his claims, how can he explain something about the real world? How can he explain the origin of money by presenting an imaginative world and an imaginative scenario about the genesis of money in that imaginative world? To be able to answer these questions we need to see what is really meant by exact laws.

According to Menger (1883: 56–59), there are two orientations of theoretical research, the realist–empirical orientation22 and the exact orientation. Realist– empirical orientation aims at investigating phenomena ‘in their “full empirical reality”, that is, in the totality and the whole complexity of their nature’ (Menger 1883: 56). Menger thinks that this is not feasible. Because ‘there are no strict empirical types in “empirical reality”, i.e., when the phenomena are under con- sideration in the totality and the whole complexity of their nature’ (Menger 1883: 56–57). What can be accomplished with realist–empirical orientation is limited to the knowledge of ‘real types (basic forms of real phenomena)’ and to ‘empiri- cal laws, theoretical knowledge, which makes us aware of the actual regularities (though they are by no means guaranteed to be without exception) in the succession and coexistence of phenomena’ (Menger 1883: 57). Thus, the realist–empirical orientation cannot arrive at ‘strict (exact) theoretical knowledge’ (Menger 1883: 58). For the realist–empirical orientation starts from concrete phenomena and their relationships, the applicability of the theory achieved by their investigation alone is limited by the spatial and temporal considerations. Note here that Menger is implicitly talking about the problems of induction. With respect to the origin of money the implication is the following: it is not possible to reach a general understanding of the origin of money by studying some of its exemplifications in history or in certain cultures.

While the realist–empirical orientation cannot provide strict laws, the exact orientation of research provides exact laws that strictly specify the relationships among phenomena. The following lengthy quote from Menger reveals the basic constituents of the exact orientation:

it [the exact orientation] seeks to ascertain the simplest elements of every- thing real, elements which must be thought of as strictly typical just because they are the simplest. It strives for the establishment of these elements by way of an only partially empirical-realistic analysis, i.e., without consider- ing whether these in reality are present as independent phenomena; indeed without even considering whether they can at all be presented independently in their full purity. In this manner theoretical research arrives at empirical forms which qualitatively are strictly typical. It arrives at results of theoreti- cal research which, to be sure, must not be tested by full empirical reality (for empirical forms here under discussion, e.g., absolutely pure oxygen, pure alcohol, pure gold, a person pursuing only economic aims, etc. exist in part only in our ideas). However, these results correspond to the specific task of the exact orientation of theoretical research and are the necessary basis and presupposition for obtaining exact laws.

(Menger 1883: 60–61, fourth emphasis added)

Thus, an explanation of the origin of money from the point of view of the exact orientation starts with specifying the simplest elements, such as the differ- ences in the saleableness of goods, inconveniency of direct exchange for market- dependent individuals and the disposition of individuals to act according to their economic interests. It creates, so to say, an abstract world where these ‘simplest’ elements are isolated from others. For this reason, it is not important whether this abstract world exists in reality exactly as it is defined in the theory or explanation. Menger (1883: 71) says that exact laws cannot be true from an empirical point of view. He (1883: 72) argues that exact laws ‘are absolutely true [. . .] as soon as’ they are ‘considered from the point of view which is adequate for exact research’. Perhaps more radically, he (1883: 73) says ‘exact economics by nature has to make us aware of the laws holding for an analytically or abstractly conceived economic world’.23

Consider Menger’s argument that exact laws are different from laws of na- ture.24 Laws of nature hold strictly for the real world, yet exact laws strictly hold for the model world created by the scientist. Theoretical economics, according to Menger, produces such exact laws. They are strict but cannot be tested di- rectly. The realist–empirical orientation cannot reach such strict laws for it tends to consider phenomena in all their complexity. Suppose that it is possible to see all the stages of the development of money in a certain culture. Even in this case, according to Menger, it would not be possible for the scientist to give a general explanation of the origin of money, for the evidence and observed regularities would be specific to this culture. The exact orientation does not examine the suc- cession of phenomena in this way:

Exact science, accordingly, does not examine the regularities in the succes- sion, etc., of real phenomena either. It examines, rather, how more compli- cated phenomena develop from simplest, in part even unempirical elements of the real world in their (likewise unempirical) isolation from all other influ- ences, with constant consideration of exact (likewise ideal!) measure. It does this without taking into account whether those simplest elements, or compli- cations thereof, are actually to be observed in reality uninfluenced by human art; indeed, without considering whether these elements could be found at all in their complete purity.

(Menger 1883: 61)

Thus, Menger argues that exact theory works with ‘isolation’.25 The researcher isolates the factors that seem (usually, to the researcher) to be responsible for the phenomenon in question from the other complexities of real life. In Menger’s exposition of the genesis of money as a medium of exchange, the simplest ele- ments of this phenomenon is singled out: a medium of exchange is used in market transactions in order to supply economic needs. Of course, Menger is aware of the fact that money is used for other purposes and that the economic side of the transactions does not represent every aspect of the earlier stages of society. Yet, he thinks that studying these factors in isolation would give us a theoretical under- standing of the origin of money. This knowledge may be about a special side of this phenomenon (e.g. economic side), but it is useful in understanding its origin.

That is, the exact orientation gives us an understanding of a special side of phenomena of human activity (abstracted from the empirical reality). [. . .] only the totality of such theories [which are produced by exact orientation], when they are once pursued, will reveal to us in combination with the results of the realistic orientation of theoretical research the deepest theoretical understanding attainable by the human mind of social phenomena in their full empirical reality.

(Menger 1883: 62–63, emphasis added)

Since exact orientation works with ‘isolation’, a full understanding of the phe- nomenon of money and its origin cannot be provided by a single exact theory of its genesis. First of all, ‘only the exact sciences in their totality are able to offer us such things, since each of them opens up only the understanding of a specific side of the real world’ (Menger 1883: 77). Second, both the exact and realist–empirical orientations of research are necessary in understanding phenomena, and ‘each of them contributes in its own way’ to this understanding (Menger 1883: 64). Thus, we have to consider his explanation of the origin of money from this perspective. It specifically focuses on the effects of market-dependent direct exchange and economising individuals. Its explanatory value, therefore, comes from its explica- tion of this special side of the genesis of money. Remember from the objections that each and every one of them focused on Menger’s description of World (t), yet none of them objected to the argument that individuals acting according to their economic self-interests would bring about a medium of exchange under the conditions of World (t), as described by Menger. The focus of Menger’s story is on the economic factors behind the origin of a medium of exchange.

The theoretical understanding of money as an organic phenomenon is no dif- ferent from other phenomena. According to Menger (1883: 140), ‘all theoretical understanding of phenomena can be the result of a double orientation of research, the empirical-realistic and the exact’. Similarly, understanding the origin of money cannot solely be dependent on exact research. Menger is by no means opposed to the historical understanding of phenomena or to the realist–empirical orienta- tion of research. What he opposes is the conception of money as a pragmatic phenomenon: he argues that although the exact and ‘realist–empirical’ orienta- tions of research may go hand in hand, the pragmatic interpretation of unintended consequences of human action is inadmissible (Menger 1883: 145). He shows that money could be considered as an unintended consequence of human action. He challenges those who consider money as a matter of design by showing theoreti- cally that it indeed follows from the basic elements of market-dependent direct exchange that money as a medium of exchange may develop as an unintended consequence of individual action. He also states that the argument that some social phenomena are the unintended consequences of human action should not be con- sidered as a mystic argument, for he thinks that it is the task of the social scientist to explicate how it developed as an unintended consequence. He basically shows how a social phenomenon develops from the individual factors of the society. His omission of the institutional factors presented by anthropologists and historians is for the sake of generality. He solely focuses on economic factors and their effects on the development of a medium of exchange. Briefly, he explicates a possible way in which certain mechanisms (i.e. economising actions dispersed individuals, imitation and learning) may interact and bring about money. In fact, economising actions of separate individuals can be considered as separate (individual) mecha- nisms and their interaction as an aggregate mechanism (or a process). In the next chapter it will become clear why this interpretation of mechanisms is useful. It is sufficient here to note that these individual mechanisms (i.e. economising in- dividuals) and their interaction brings about a commonly accepted medium of exchange under the conditions of market-dependent direct exchange.

Source: Aydinonat N. Emrah (2008), The Invisible Hand in Economics: How Economists Explain Unintended Social Consequences, Routledge; 1st edition.

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