Menger on the Origins of Money - Article Example

Menger on the Origins of Money Introduction: The Marginalists or the Austrian school of economics would be remembered mostly for the introduction of subjective value in economics. Though initially they have maintained their own thought processing but within 1920s to 1930s they have joined the mainstream neoclassical school of economics (Endres, 2002, p. 207). Methodological individualism, subjectivism, opportunity cost and time dimension, might be considered as the four pillars of Austrian School of economics that have helped the same to keep its distinction even amid the neoclassical school of economic thought. The concerned school of economic thought puts great emphasis on the individual behaviour and try to see or explain things through that. As an example the methodological individualism states that entire motivations of agents and institutions are derived from the individuals. Again subjectivism implies that in order to understand the individual actions concerning knowledge, beliefs together with the expectations initiating that particular action of the individual is of utmost importance. Moreover the opportunity cost highlights individual behaviour in an indirect way. It states that an individual choses to be involved in that alternative, which provides him with highest possible profit. Again coming to time dimension, whether that is linked to consumption or production; it is an individual or group of individuals who decides to allocate time to the same according to his preference and ease (Endres, 2002, p.7). Carl Menger might be considered as the forefather of the Austrian school of economics (Milonakis and Fine, 2013, p.101). The present paper tries to highlight one of his epic works “On the Origins of Money” translated by C. A. Foley; where he carefully investigates the initiation, formation and eventual acceptance of the Money as it is today. The main emphasis of the current paper is on the way Menger (1892) tied an important knot between saleability of certain commodity or commodities and their eventual acceptance as a mean of transaction or Money. Menger (1892) starts his article questioning the existing theory of money. According to him, money as a medium of exchange and its genesis from the fact that it is a usual phenomenon or a legal status bestowed upon itself is an effort to make things simple upon the failure to provide any proper explanation. He also questions the reasons lying behind the presence and almost universal acceptance of precious metals as a mean of exchange (Menger, 1892, pp.15-18). The classical and neoclassical root of Menger gets reflected when he refers to money as a medium of exchange between individuals with mutually conflicting interest but at the end leading to a common good. This somewhere reminds of the invisible hands of Adam Smith (Smith, 1778, p.35). However, Menger (1892) reveals his sceptics on the simplicity of existing theory of money as according to him a thing of such great importance and universal acceptance irrespective of time and place could not have existed with roots spread far wide and deep than it is usually conceived and no particular historical evidence does exist that could have facilitated the understanding regarding the same (Menger, 1892, p.17). He has acknowledged the earlier theorists expressing interest on the origin and evolution of money as it is today and he has also considered the findings of them regarding the acceptance and existence of precious metals as a medium of exchange. However, he has termed their findings as unhistorical as according to him all of them presupposes the existence of money and have not shed any light on the fact that why and how only a few metals managed to get qualified as the medium of exchange or a replica of money (Menger, 1892, pp.16-18). At this juncture Menger (1892) has also criticized the earlier theorists for not admitting their lacuna and not giving much importance on what has remained a foggy concept (Menger, 1892, p.17). Menger (1892) from here on takes up the noble onus of demystifying the origin of money and the way it stands amid all other commodities; dictating terms and taking commands. To be precise in this particular article Menger (1892) along with tracing the origin of money also takes up the possible explanation that how money became the propelling factor of the world. Menger (1892) starts with the problems that were once associated with the common agreement on a medium of exchange. He highlights the problems that riddled the days of the barter economy. First of all barter economy was solely dependent on exchange of different goods among individuals. One individual who possess some commodities in excess of his present need and in need of some other commodities that he might not have under his possession would approach the market to find an individual who has the goods of his need and on the other hand is in need of the good that the first individual possess (Menger, 1892, pp.19-21). This entire process is quite jeopardized owing to several reasons first of all this involves a matter of chance; as the concerned two individuals might never meet. Secondly even if they meet they might not have complementary needs where they can involve into an exchange. At this circumstance either one of the individual has to find another individual with complementary needs or embraced with the product that might be required by either of the individual. Lastly the aforementioned phenomenon would have made the production of less saleable but important goods almost impossible (Menger, 1892, pp. 19-21). All these problems of barter economy have been noticed by Menger (1892) and he rightly classified them as the foundation of monetary theory. The introduction and evolution of money and how does that eradicated the problems that were inevitable under barter economy became the ultimate destination for Menger’s (1892) “On the Origins of Money”. From here on Menger (1892) introduces the two most important aspect of this article; saleability and difference in the degree of saleability among various articles or products. This concept perhaps lies at the root of the theory of money or more precisely on the origin of money. Unlike his predecessors Menger (1892) devoted great rigor in explaining the aforementioned phenomenon and yet explained things in a simple but meaningful way that deserves applaud. With all due respect to the earlier theorists roaming within the same realm, Menger’s (1892) work should be revered for its novelty and promptness (Menger, 1892, pp. 23-32). Menger (1892) starts his explanation by negating the usual economic theory of exchange. According to him the assumption that governs the concerned theory that at any point of time and place any two goods might be exchanged, however might be not always in one to one correspondence is fallacious. Furthermore the buying price of a commodity for a buyer and the selling price for the same commodity for the same person are of different magnitude. Both of these points that Menger (1892) made deserves great importance as far as origin and evolution of money is concerned (Menger, 1892, pp.23-32). Even if the market is nearly perfectly competitive there would be a difference between the purchasing and the selling price and usually the selling price would be less than that of purchasing price; implying a loss for the buyer come seller. The “objective equivalent in goods” (Menger, 1892, p.24) if holds true the entire economic cocoon encompassing trade and commerce even circulation among individuals would have become a simple thing to consider. The associated loss would be a function of quantity to be disposed of and the time the seller can held the commodity to be sold under his possession till the price reaches either the economic price of the commodity or a price with very less loss to be incurred. For the time being type of commodity is ignored, however this is the most important factor as would be revealed with the gradual progress of the present article (Menger, 1892, pp. 23-32). So far; what Menger (1892) has highlighted are three important reasons that might be responsible for the formation and evolution of money as it stands today - imperfect substitutability between commodities, the difference in buying and selling price of the same commodity, and the difference in saleability among different commodities. The last one as mentioned earlier was ignored for the time being but now deserves special attention (Menger, 1892, pp. 23-32). Commodities are different in terms of their use and character. Considering this a commodity might be more desirable at any point of time and at any place than others. A person with the possession of such commodity would enjoy greater control over the market and can secure any other commodity that he wants in exchange of the commodity he possesses. Another person bereft of that particular commodity and with the possession of a commodity that might be less desired would found himself in less favourable position in the market (Menger, 1892, pp. 23-32). To improve his situation either he has to sell his product at the price set by the person with most desired commodity and that would definitely be at a loss. The entire economic theory stands upon rationality and a rational seller or buyer would definitely take advantage of his superior position in the market. Again it might also happen that the person with most desired commodity does not need the commodity at all that the mentioned person possess. In this case the person must exchange his commodity with someone else who has the commodity that the person with most desired commodity wants and exchange the same with him. This again usually ends up in a loss for the person standing in an unfavourable position or with the possession of a commodity less desired (Menger, 1892, pp. 23-32). If there would have been no money this would led to the extinction of production of the less preferred commodity or a commodity with less market command. On the other hand if there would have been perfect substitutability among commodities, no hindrance of exchange of one commodity for the other at any point of time and place, any commodity could have been hoarded for any period of time by any one and no difference between buying and selling price; there might have been no need of money. However, all these aforementioned things do exist and that has helped in the initiation of money as well as its gradual development (Menger, 1892, pp. 23-32). Menger (1892) also provides the reasons for the degree of variability among commodities regarding their saleability in market. He divides the reasons in two parts time bounds and spatial bounds. In general the bounds encompass the available demand for a particular commodity as well as the part of the demand that is not met for that commodity in a market or the demand supply gap for that commodity in a market. The purchasing power of the consumers present in that market. Whether the concerned commodity is divisible or can be adjusted according to the need of the customers. The number of buyers and sellers deal in that market on regular basis or in other words the status of the market.The speculation of the consumers regarding that product. This speculation can be regarding the future supply of the product or the future price of the same (Menger, 1892, pp. 23-32). If these bounds are further divided into spatial and time bounds then a clearer picture would emerge regarding the reasons leading to difference in saleability among products. The spatial limits this way encompass the demand of a commodity in a place, whether the goods are transportable and the associated cost of transport, the means of transport available and the degree of development of associated commerce for that good, whether the target market is already an extension of an organized market and the associated chances of arbitrage and whether any barrier for commerce and trade does exist among different markets regarding the concerned goods (Menger, 1892, pp. 23-32). Similarly the time limits include, the permanence of demand for that specific commodity, whether they are perishable or not, cost of preservation as well as storing that particular commodity, the rate of interest, which would be the opportunity cost of the capital invested this way, whether the demand is seasonal, speculation regarding time bargaining for that particular commodity, whether any barrier on transferring that particular good between two time frame does exist (Menger, 1892, pp. 23-32). These spatial and time bounds on the saleability of goods illustrates why any difference considering the same does exist. Some goods are accepted beyond any spatial and time limits without confronting any social or political hindrance. On the other hand some goods have to confront barriers of every kind in each step. This difference turns some goods more saleable than others and eventually they enjoy more market power and greater desirability on behalf of both buyers and sellers (Menger, 1892, pp. 23-32). As transaction started to take place over greater space and longer period of time; individuals realised that possession of more saleable goods over less saleable ones is much more desired and profitable. The more saleable goods or widely acceptable goods qualified following their costliness, ease of transport and preservation. Eventually these goods gave their possessor an almost never ending command over all other goods available in the market irrespective of space and time. Over the time people became more aware of these goods and it almost became their habit to prefer these goods over others as the good of possession. This tradition that emerged from the higher saleability of those goods and comparatively inferior saleability of other goods in the market turned those higher saleable goods as the medium of exchange (Menger, 1892, pp. 33-38). This habit eventually gave birth to the medium of exchange. Surprisingly those goods that have qualified as the medium of exchange might be entirely useless to the possessor or to someone who wants to possess them, yet their high level of acceptance among others and exchangeability for any other goods that one might need at any place and time made them the ultimate goods to possess. This knowledge regarding a particular good or a set of goods fragmentally arise in the society but over time it became general and thus those goods became the medium of exchange for all irrespective of time and place. This explanation as extended by Menger (1892) resembles his most important contribution in economics namely economic theory of social institutions where he claims that social institutions are products of evolutionary process (Soto, 2009, p.21). Hence it is a culmination of practise and habit that gave birth to the medium of exchange. If instead the same the origin of money would have been left strictly on the legislature procedure then it would definitely have yielded erroneous result as the origin and development of money is a social phenomenon that happened over decades rather than by overnight decision of the legislative members. It is the difference of saleability among different goods that eventually laid the first seed of the development of money (Menger, 1892, pp. 33-38). Once certain goods got qualified as money; those people with the possession of the same started to enjoy superior power in the market regarding gaining possession of other goods of their choice. On the other hand those with less saleable goods found themselves amid an unfavourable condition and immediately wanted to exchange their goods for those goods considered as money. However, that exchange procedure is not in their hand. Since their goods are less saleable, hence they might find themselves against an unfavourable bargaining situation that might impose huge loss on them. They can play a waiting game if they are capable of and wait for the time to turn in their favour and incur somewhat less loss (Menger, 1892, pp. 33-38). However, it is quite clear that the possession of money provides flexibility both in terms of buying and selling and set free an individual from the vicious circle of compulsory selling. Initially this was a habit of economic action: procurement of most saleable goods that later turned into money as Menger (1892) explains “What therefore constitutes the peculiarity of a commodity which has become money is, that the possession of it procures for us at any time, i.e., at any moment we think fit, assured control over every commodity to be had on the market, and this usually at prices adjusted to the economic situation of the moment; the control, on the other hand, conferred by other kinds of commodities over market goods is, in respect of time, and in part of price as well, uncertain, relatively if not absolutely.” (Menger, 1892, p.42). By now it is clear that ultimately it is the degree of differentiation of saleability among products that gradually but universally took place and gave birth to money. From their day to day behaviour as well as jurisprudence people learned that commodities might be classified under two categories one that has money inherent in it and the other that has not. Rational behaviour of the people compelled him to choose those products that are more closely attached with money over those which are less likely to be readily translated into money. Another important aspect that the discussion till now has highlighted is that the buyers ultimately determined the money goods not the sellers and therefore the development of money might be classified as a buyer phenomenon rather than that of a seller. Though, this is also true that the emergence of money received a positive catalyst through state intervention. Menger (1892) also extends his explanation on the fact that why the precious metals became money. Among several reasons that Menger (1892) has highlighted the most important are the unmatchable saleability, divisibility to extreme and with viable economic power even at a small amount, durability, low transport cost and historically the class that held the precious metals most were also the most effective to bargain as far as market based activities were concerned. Moreover, even before it became money the demand supply gap for precious metals was so high that bridging of that gap within a thinkable timeframe was almost impossible. Anyone with the possession of the precious metals can own any other commodity for all these aforementioned reasons. All these worked in favour of the precious metals that they gradually promoted themselves as the most important medium of exchange or money. In Menger’s (1892) own words “they hereby function as commodities for which every one seeks to exchange hismarket-goods, not, as a rule, in order to consumption but entirely because of their special saleability, in the intention of exchangingthem subsequently for other goods directly profitable to him. No accident, nor the consequenceof state compulsion, nor voluntary convention of traders affected this. It was the just apprehending of their individual self-interest which brought it to pass, that all the more economically advanced nations accepted the precious metals as money as soon as a sufficient supply of them had been collected and introduced into commerce.” (Menger, 1892, pp.48-49) Another fact that has helped precious metals to be the foremost medium of transaction is their stability in terms of price comparing to other commodities subject to smaller fluctuations in the same. Moreover, the easy to control standard for precious metals has also reduced the chance of forgery and that again boosted its universal acceptance as money (Menger, 1892, pp. 49-50). Though, the state had little to do with the development of money, yet its role in promoting the concept and fixing some parameters for genuineness, ease of calculation, setting specific shape and weight cannot be ignored. The state has rightly recognised the possible difficulties associated with more than one commodity as the mean of exchange and eradicated that possibility with the introduction of precious metals as the only form of money. In this sense though the state has not introduced money in the society but nevertheless it has perfected and promoted the same with all its might (Menger, 1892, pp. 51-52). Conclusion: Menger (1892) took up the noble onus to lead his voyage right into the heart of the origin of money. Unlike his predecessors he has not taken it for granted that money evolved over the night or it is a legislative process imposed by the state. He rightly concluded that money evolved from the society. Menger (1892) emphasized on the degree of differentiation of saleability of goods as the first shown seeds to the formation of money. He has also explained why such differentiation exists and how such differentiation eventually promoted a few goods as the medium of exchange and their possession far more important than other goods. He has emphasized on habit and practise of the individuals that ultimately created money and also highlighted the buyers over the sellers in the process that helped to the evolution of money as it is today. He has negated the possibility that state had any role to play in the creation of money; however, he has also mentioned that the role of the state has definitely promoted money through setting standards and eradicating any possible alternatives. Regarding the promotion of precious metals as the universal form of money or media of exchange Menger (1892) emphasized on their universal acceptance, proportional advantage against most other commodities, qualitative assurance, ease of transport, durability and others. At the end he has concluded that the origin of money is not a legislative concern as conceived by many but a social phenomenon that evolved through time and space and eventually got accepted universally. References Endres, A. (2002), Neoclassical Microeconomic Theory, London: Routledge Milonakis, D. and B. Fine (2009), From Political Economy to Economics, London: Routledge Menger, C. (2009), On The Origins of Money, Ludwig Mon Mises Institute Smith, A. (1778), An Enquiry into the Nature and Causes of Wealth of Nations, W. Strahan and T. Cadell Soto, H.J. (2009), Money, Bank Credit and Economic Cycles, Ludwig Mon Mises Institute Read More