Menger’s explanation on the origin of money

Menger’s explanation of the origin of money is an example of what Menger’s calls an organic explanation. Menger thinks that natural organisms are analogous to certain social phenomena in a limited way. He argues that ‘there exists a certain similarity between natural organisms and a series of structures of social life, both in respect to their function and their origin’ (Menger 1883: 129). Yet, although he admits that there is a similarity between the origin and function of these phenom- ena and of natural organisms, he alerts us to the limitations of this analogy:

it is not an analogy that covers the entire nature of the phenomena concerned, but only partial aspects of them. In this respect it is again only a partial anal- ogy.

(Menger 1883: 131)

According to Menger, only some social phenomena are analogical to social organ- isms and with respect to the applicability of this analogy, social phenomena can be divided into two categories:

  1. Social phenomena that are ‘the result1 of purposeful activity of humans directed toward their establishment and development’ (Menger 1883: 131) or ‘are the results of common will directed toward their establishment (agreement, positive legislation, etc.)’ (Menger 1883: 133).
  2. Social phenomena that ‘are the unintended results of human efforts aimed at attaining individual goals’ (Menger 1883: 133).

In Menger’s terminology the first type is called pragmatic phenomena and the second type organic phenomena. (In Table 2.2, cells 1.6, 1.7 and 1.8 represent organic phenomena, and cell 2.5 represents pragmatic phenomena.) Those phe- nomena that are similar to natural organisms, with respect to their function and their origin, are in fact the social institutions and structures that are the unintended consequences of human action, that is, organic phenomena.

Similarly we can observe in numerous social institutions a strikingly appar- ent functionality with respect to the whole. But with closer examination they still do not prove to be the result of an intention aimed at this purpose, i.e., the result of an agreement of members of society or of positive legislation. They, too, present themselves to us rather as ‘natural’ products (in a certain sense), as unintended results of historical development.

(Menger 1883: 130)

According to Menger (1883: 130), money, law, language, markets, etc. are exam- ples of such phenomena.

As for the incompleteness of the analogy, Menger stresses the differences be- tween realms of natural organic phenomena and social organic phenomena. For example, Menger (1883: 133) rejects the idea of mutual causation between the whole and its parts, he thinks that this is a vague idea and it is inadequate for our laws of thinking. More importantly, he argues that forces acting in nature are different than the ones in the social realm. In nature purely mechanical forces are working but the social realm is dominated by intentional activities:2 ‘they are, rather, the result of human efforts, the efforts of thinking, feeling, acting human beings’ (Menger 1883: 133).

Menger (1883: 135) notes the following consequences of these limitations in the organism analogy. First of all, the limitations of this analogy necessitate an understanding of organic as well as of pragmatic phenomena in the social realm. Second, the application of the organism analogy cannot provide a full understand- ing of organic phenomena:

The mechanical application of the methods of anatomy and of physiology to the social sciences is therefore not permissible even within the narrow limits indicated above.

(Menger 1883: 136)

Given the limitations, it is not possible to study organic phenomena as biologi- cal organisms. Menger argues that we do not need to examine organic phenomena as a whole3 and that the study of the constituent parts of organic phenomena is more appropriate.

The acknowledgement of a number of social phenomena as ‘organisms’ is in no way in contradiction to the aspiration for exact (atomistic!) understanding of them.

(Menger 1883: 141)

From the above argument, it should be clear that even though Menger thinks that origin and function of the unintended consequences of human action resem- ble that of organisms, he does not argue that they should be examined in a holistic way. The relevant question, generally known as the Mengerian question, that should be asked when examining such phenomena is:

How can it be that institutions which serve the common welfare and are ex- tremely significant for its development come into being without a common will directed toward establishing them? [. . .] What is the nature of all the above social phenomena [. . .] and how can we arrive at a full understanding of their nature?

(Menger 1883: 146, 147)

Here, although Menger does not rule out disadvantageous unintended conse- quences, he is clearly interested in explaining the beneficial ones (cell 1.6 in Table 2.2). The answer to this question would constitute an organic explanation, accord- ing to Menger. That is, an organic explanation explains either the origin or the function of the social patterns or institutions that are the unintended consequences of human action.

1. Money

Before examining Menger’s explanation of money as an organic phenomenon, it is useful to discuss the meaning of ‘money’. According to the Merriam-Webster’s dictionary, ‘money’ is something that is generally accepted as a medium of ex- change, a measure of value, a unit of account or a means of payment. We know that there are officially coined or stamped metal money, paper money, commod- ity money, and money of account. Yet the definition and identification of this ubiquitous phenomenon might be troublesome if one wants to explain its origin. Shall we trace the history of the coins and banknotes? Or, shall we go further to look for items that served the functions of ‘money’ in earlier tribes, cultures, and civilizations? What are the essential functions of money? Is it possible that what is an essential function of ‘money’ today may not be a function of ‘money’ in its earlier forms?

Dalton (1971b: 172) argues that modern money (e.g. US dollars, euros, Turk- ish liras, etc.) performs all the functions of money (as defined above) for all types of transactions and payments. Modern money is, so to say, all-in-one money. We do not consider precious metals or jewellery as money because they ‘come into existence for reasons other than money-ness. Each is capable of one or two money uses’ but they do not serve all the functions (i.e. a medium of exchange, a store of value, a unit of account, etc.) of modern money as the euro does. Dalton argues:

primitive monies or valuables used in reciprocal and redistributive transac- tions are the counter parts of these limited or special purpose monies [e.g., jewellery, bonds, stocks etc.], and not of dollars as media of (commercial) exchange; they resemble dollars only in non-commercial uses (paying taxes and fines, and in gift giving).

(Dalton 1971b: 172)

Briefly ‘primitive’ money is limited-purpose money in comparison to modern money. They are similar, but still so different that an explanation of the origin of limited-purpose money (e.g. bride money) should be different from an explana- tion of the origin of a generally accepted medium of commercial exchange.

The differences between modern money and ‘primitive’ money should alert us to the fact that the delineation of the explanandum phenomenon, in our case ‘money’, is essential in understanding its explanation. To be able to understand an explanation of the origin of ‘money’ one needs to know what is considered as ‘money’ in that explanation. Explanations of the origin of money may take dif- ferent forms under different definitions of money. This is particularly important if we want to understand how different explanations of the origin of money stand next to each other.

2. The origin of money

In his ‘On the Origins of Money’ Menger (1892a) tells us at the outset that he is interested in explaining the emergence of a generally acceptable medium of exchange:

There is a phenomenon which has from of old and in a peculiar degree at- tracted the attention of social philosophers and practical economists, the fact of certain commodities (these being in advanced civilizations coined pieces of gold and silver, together subsequently with documents representing those coins) becoming universally acceptable media of exchange.

(Menger 1892a: 239, emphasis added)

He observes that at different times and places different types of commodities served as ‘money’ to different cultures and nations. Yet, he focuses his attention on one property of those tokens, on their functioning as a generally accepted me- dium of exchange.4 His explanation basically states that (contrary to the common belief)5 a medium of exchange could have emerged out of the dispersed actions of the individuals, without a ‘common will directed towards establishing’ it. This is, in fact, the type of research project that he wants to promote in social sciences, especially in economics, as stated in what we have called the Mengerian question. To answer this question with respect to money, he first observes that different commodities have different degrees of saleableness at different times and places. Some goods are available at some places and cannot be found in others. Given the cultural background and environmental conditions some commodities are needed more than others. Some goods have certain properties that others do not have, such as durability. Briefly, in any place there is a certain set of goods some of which are more saleable than others. Indeed, Menger wants to show that the phenomenon of ‘money’ can be understood in terms of its high saleableness:

The theory of money necessarily presupposes a theory of the saleableness of goods. If we grasp this, we shall be able to understand how the almost unlimited saleableness of money is only a special case, – presenting only a difference of degree – of a generic phenomenon of economic life – namely, the difference in the saleableness of commodities in general.

(Menger 1892a: 243)

The question is, ‘given the differences in the saleableness of goods,6 how could a generally accepted medium of exchange emerge?’

After registering the fact that saleableness of goods differs, Menger goes on to register another ‘fact’: the fact that individuals act according to their economic (self-)interests. Yet, he neither argues that this is the only motivation of human beings, nor that this statement is valid under every condition. Menger consid- ers economic interests as an important factor in explaining economic phenomena given that individuals are market dependent. Thus, market dependence is another important factor in his explanation.

Among the factors that increase the differences in the saleableness of goods we find factors such as the ‘development of the market’, ‘development of commerce’, ‘the permanence of the need’, ‘periodicity of the market’, etc. (Menger 1892a: 246–247) Moreover, whenever Menger talks about ‘economic interests’ he is in- terested in showing the individuals’ interest in overcoming the inconveniencies of direct exchange, which necessarily implies individuals’ dependency on their exchanges at the marketplace:

when any one has brought goods not highly saleable to market, the idea up- permost in his mind is to exchange them, not only for such as he happens to be in need of, but, if this cannot be effected directly, for other goods also, which, while he did not want them himself, were nevertheless more saleable than his own. By so doing he certainly does not attain at once the final object of his trafficking, to wit, the acquisition of goods needful to himself. Yet he draws nearer to that object. By the devious way of a mediate exchange, he gains the prospect of accomplishing his purpose more surely and economi- cally than if he had confined himself to direct exchange.

(Menger 1892a: 248)

It is evident that the need for certain goods is essential here. If individuals do not need to exchange goods to meet their needs then it is less likely that they will try to solve the problem of ‘double coincidence of wants’.7 Likewise, Menger explicitly states that an important requirement for the need for a generally ac- ceptable medium of exchange to emerge is increased market traffic. That is, if individuals exchange goods infrequently they may not need to find ways out of the existing situation of troublesome direct exchange and they may not be able to learn how to improve their situation:

With the extension of traffic in space and with the expansion over ever longer intervals of time of prevision for satisfying material needs, each individual would learn, from his own economic interests, to take good heed that he bar- tered his less saleable goods for those special commodities which displayed, beside the attraction of being highly saleable in the particular locality, a wide range of saleableness both in time and place.

(Menger 1892a: 248, emphasis added)

As the market traffic increases, the possibility that individuals could find out the advantages of using more saleable goods in their exchange increases. Thus, Menger takes into account the increase in needs and the gains and losses of indi- viduals in relation to the market traffic. When there are more goods to exchange:

  1. the trouble of bringing them to the market;
  2. the loss resulting from no exchange;
  3. the loss resulting from exchanging goods with less saleable goods that are not demanded immediately; and
  4. the gain from exchanging goods with goods that may be easily exchanged with other goods increases.

Menger assumes that the conditions under which a medium of exchange emerges should have started from an environment where individuals already ex- change goods. Moreover, the individuals could not have continued their life solely on the goods that they individually produce. This is an environment where there is no medium of exchange (since he wants to explain its emergence) and individu- als exchange their goods directly. In sum, the initial conditions are defined by the existence of direct exchange and by the intentions of the market-dependent individuals to exchange good(s) for good(s) to which they have immediate need. Menger assumes that direct exchange is not convenient for market-dependent in- dividuals and that in such an environment the owner of the most saleable goods should have exchanged her goods much more easily than others – because, by definition, there is more demand for more saleable goods.

Given these assumptions, the most significant force in the process of the emer- gence of money is the ‘individuals who are engaged in economising actions’. In principle, Menger’s individuals are capable of observing the state of affairs at the market. They are hypothesised roughly to observe:

  • that it is not always possible to exchange one’s goods with the goods one needs;
  • that it is inconvenient to exchange one’s goods with the goods one does not need, if that good is not easily accepted by others at the market;
  • that it is easier to exchange some goods than others, and that there is greater demand for those goods; and
  • that it would be more convenient to exchange one’s goods with these easily saleable goods in the case that one cannot exchange her goods with goods that she immediately needs.

Menger portrays individuals as being more or less ‘rational’ and focuses on their economising actions concerning direct exchange. He argues that the ten- dency to behave ‘rationally’ (to economise) increases as the intensity of exchange increases – although economising does not solely depend on market traffic. He also observes that individual capacities of ‘realising’ facts can differ and that this may take time and the process within which a medium of exchange emerges in- volves some mechanism like imitation:

It is only in the first instance a limited number of economic subjects who will recognize the advantage in such procedure, an advantage which, in and by itself, is independent of the general recognition of a commodity as a medium of exchange, inasmuch as such an exchange, always and under all circumstances, brings the economic unit a good deal nearer to his goal, to the acquisition of useful things of which he really stands in need. But it is admitted, that there is no better method of enlightening any one about his economic interests than that he perceive the economic success of those who use the right means to secure their own.

(Menger 1892a: 249, emphasis added)

Menger thinks that some individuals may realise the state of affairs earlier than others and adopt the strategy of exchanging their goods with more saleable goods when they cannot find the goods they need. Some others may ‘imitate’ or ‘learn’ from these individuals. Thus, the process of money’s emergence can also be considered as a discovery process.

Given the high level of market transactions and economic dependency of the individuals on market transactions, individuals try to minimise their ‘transaction costs’ by using more saleable goods in their exchange. Individuals intentionally prefer some goods to others (e.g. more saleable or more needed goods), but they do not have the intention to bring about something as a generally accepted me- dium of exchange. In a way, in this process some of the goods are filtered as ‘nominees’ for being a generally accepted medium of exchange. Moreover, there is positive feedback from the market environment that encourages more people to use more saleable goods in their exchange; that is, if more people start using more saleable goods in their exchange the market traffic increases and the increased market traffic necessitates the use of a more saleable good in exchange.9 This feedback also keeps the process going:

When the relatively most saleable commodities have become ‘money’, the great event has in the first place the effect of substantially increasing their originally high saleableness. Every economic subject bringing less saleable wares to market, to acquire goods of another sort, has thenceforth a stronger interest in converting what he has in the first instance into the wares which have become money.

(Menger 1892a: 248)

This implies that the range and relative ranking of the goods (according to their saleableness) are changing in the process of the emergence of money. What is becoming a generally accepted medium of exchange becomes more and more saleable.10 The end state of this process is the emergence of a generally accepted medium of exchange. This institution is the unintended consequence of the ac- tions of economising (self-interested) individuals:

It is clear, rather, that the origin of money can truly be brought to our full understanding only by our learning to understand the social institution dis- cussed here as the unintended result, as the unplanned outcome of a specifi- cally individual efforts of members of a society.

(Menger 1883: 155)

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

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