Smith, Jevons and Mises on money

1. Smith on money

A similar story of the origin of money to that of Menger’s can be found in Adam Smith’s The Wealth of Nations. Smith builds the story of money on his ideas about the emergence of the division of labour:

This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

(Smith 1789: I.2.2, emphasis added)

(Note that Smith sees division of labour as an unintended consequence of human action. See Chapter 5 of this book on Smith’s ‘invisible hand’ and ‘unintended consequences’.)

According to Smith, it is the human propensity to exchange goods that opens the way to the division of labour:

And thus the certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.

(Smith 1789: I.2.3, emphasis added)

He argues that while the disposition to exchange goods stimulates the division of labour, it is the ‘extent of the market’ that limits this effect:

When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to ex-change all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for.

(Smith 1789: I.3.1)

Thus, the existence of a market and its size is a precondition of the develop- ment of the division of labour; a condition that also finds its place in Menger’s exposition of the origin of a medium of exchange. Given that individuals are able to exchange goods at the market, and given that this leads to specialisation, Smith (1789: I.4.1) argues, ‘it is but a very small part of man’s wants which the pro- duce of his own labour can supply’. For this reason, individuals are forced, even more, to exchange goods at the market to acquire the goods they need. That is, market exchange encourages the division of labour that, in turn, encourages more exchange. Yet, with the increased market traffic, the inconveniencies of direct exchange become more important for every individual who needs to exchange his products in the market to be able to supply his needs:

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.

(Smith 1789: I.4.2, emphasis added)

Although Smith does not have a theory of saleableness, he argues that metals would be good candidates for being a medium of exchange for they have certain characteristics (e.g. durability, easy storage) that would give good reasons to think that other people would be likely to accept them. In Smith’s version, money de- velops out of direct exchange among market-dependent individuals’ actions to overcome the inconveniencies of direct exchange. Smith goes further to argue that after the emergence of a medium of exchange, new inconveniencies would follow and they are to be solved centrally by issuing a standardised money.

2. Jevons on money

Jevons (1876) extensively discusses the early forms of money in Money and the Mechanism of Exchange. He starts the book with a discussion of ‘barter’, where he discusses the inconveniencies of barter. According to him, barter or direct ex- change was how early societies supplied their needs. In this stage of society, he argues, it is difficult to find double coincidence of wants, and, moreover, individu- als would be in want of a measure of value and a means of subdivision:

three inconveniences attach to the practice of simple barter, namely, the im- probability, of coincidence between persons wanting and persons possess-ing; the complexity of exchanges, which are not made in terms of one single substance; and the need of some means of dividing and distributing valuable articles.

(Jevons 1876: III.1)

According to Jevons, money solves these inconveniencies by serving as a medium of exchange and a common measure of value. He also argues that other functions of money, such as being a standard of value and a store of value, follow these two functions. The qualities of a commodity that is used as material money– such as its utility, portability, indestructrability, homogeneity, divisibility, stabil- ity of value and cognisability – are related with these functions. He argues (1876: V.2), ‘money requires different properties as regards to its different functions’. He observes that the most important quality of a commodity that would help its acceptance as ‘a medium of exchange’ and a ‘store of value’ is its utility:

Certainly, in the early stages of society, the use of money was not based on legal regulations, so that the utility of the substance for other purposes must have been the prior condition of its employment as money. [. . .] We may, therefore, agree with Storch when he says: – ‘It is impossible that a substance which has no direct value should be introduced as money, however suitable it may be in other respects for this use.’

(Jevons 1876: V.4)

For example, Jevons (1876: IV.5) argues that in the pastoral stage sheep and cattle were used as money for they were naturally ‘the most valuable and negoti- able kind of property’. (Note that Jevons presents etymological and historical evidence on this point. See Jevons 1876: IV.7.) Jevons does not have a story of the origin of ‘money’ in its earlier forms, but based on the above quotation, it is plausible to argue that he believes that the driving forces in the genesis of money were inconveniencies of barter, self-interest and custom. Coined money, however, was issued by central authorities.

Also note that Jevons (1876: VIII.22–25) argues that force of habit and social conventions are important in understanding social phenomena:

Over and over again in the course of history, powerful rulers have endeav- oured to put new coins into circulation or to withdraw old ones; but the in- stincts of self-interest or habit in the people have been too strong for laws and penalties.

(Jevons 1876: VIII.22)

We must notice, in the first place, that the great mass of the population who hold coins have no theories, or general information whatever, upon the sub- ject of money. They are guided entirely by popular report and tradition. The sole question with them on receiving a coin is whether similar coins have been readily accepted by other people.

(Jevons 1876: VIII.23)

3. Mises on money

In The Theory of Money and Credit, Mises’s (1954) story of the origin of money is very similar to that of Menger’s, thus there is no need to present it here. Below is a representative passage from his version of the story:

those goods that were originally the most marketable became common media of exchange. [. . .] And as soon as those commodities that were relatively most marketable had become common media of exchange, there was an increase in the difference between their marketability and that of all other commodities, and this in its turn further strengthened and broadened their position as media of exchange.

(Mises 1954: I.1.10)

He makes similar assumptions about the initial stages of the society, as can be seen below:

Where the free exchange of goods and services is unknown, money is not wanted. [. . .] The phenomenon of money presupposes an economic order in which production is based on division of labor and in which private property consists not only in goods of the first order (consumption goods), but also in goods of higher orders (production goods). In such a society, there is no systematic centralized control of production [. . .] The function of money is to facilitate the business of the market by acting as a common medium of exchange.

(Mises 1954: I.1.1–2)

The idea that money can only exist under free exchange and that the existence of free commercial transactions is a precondition for the existence of money is as controversial as the assumption that human beings have a disposition to exchange. It is these assumptions that reduce the credibility of the explanation of the emer- gence of money as an unintended consequence of human action. The objections to these assumptions are discussed in Chapter 3.

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

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