Thanks to Mike Otsuka for pointing me towards a new article by Smit, Buekens, and Du Plessis in the Journal of Institutional Economics, which addresses the vexed question what is money?
Here is the first part of the abstract:
What does being money consist in? We argue that something is money if, and only if, it is typically acquired in order to realise the reduction in transaction costs that accrues in virtue of agents coordinating on acquiring the same thing when deciding what thing to acquire in order to exchange.
In giving that answer, Smit et al explicitly reject John Searle’s proposal, that “an object is money if it is collectively counted as money among a group of agents” (329). Their reasoning is: people debate whether bitcoin (e.g.) counts as money. Searle’s view seems to imply then that bitcoin is money for some people and isn’t money for others. But:
This, however, is not very satisfactory. It seems to leave a basic theoretical itch unscratched and to miss the degree to which the people who dispute such things take themselves to differ on some substantive issue. (329)
The authors go on:
A more compelling answer to whether bitcoins are money would be to identify some theoretically interesting, explanatory characteristic shared by those things we uncontroversially consider to be ‘money’ and to see if bitcoin has the characteristic in question. (330)
They then examine three proposed characteristics. Money:
- functions as a medium of exchange
- functions as a store of value
- functions as unit of account
They then rule out 2 and 3 by pointing to counterexamples. People often hold money even when it depreciates in value; we do not therefore say it isn’t money. So 2 is out. 3 is ruled out by a more elaborate and hypothetical counterexample, in which inflation renders a currency inappropriate as a unit of account, but it is still used to settle payments (sellers quote prices in some unit other than the currency, to avoid menu costs, and then calculate the currency-price at the point of exchange).
This leaves 1. But “medium of exchange” isn’t very informative, so the authors spell it out in more detail. First we should recognise that “the transaction costs incurred by an economic agent decrease as a function of the amount of agents that she transacts with that transact in the same currency.” (330)
This is a reference to the old “double coincidence of wants” problem associated with barter societies. Money is more convenient than barter, which is what we would have if we didn’t have money. This is the textbook story of the function of money; here it is in a textbook (Samuelson and Nordhaus, 2010, 459):
This leads the authors to their definition of money:
something is money among a group of interacting agents if, and only if, it is typically acquired in order to realise the reduction in transaction costs that accrues in virtue of such agents coordinating on acquiring the same thing when deciding what thing to acquire in order to exchange. (331)
Right away the authors clarify:
Note that we need not require that the agents in question understand their practice in such terms. The agents themselves may have all manner of false beliefs about their practice. Yet their practices are sustained, and their behaviour explained, by the fact that the adoption of a currency has such a coordinating function. (331)
My question here is whether money really does function to reduce transaction costs. It is important for the account above that a barter society is what we would have if we eliminated money. This is different from the question of whether there ever was a barter society in the past. What needs showing is that, given human psychology and social arrangements, the lack of an “agreed medium of exchange” in our society would give rise to the higher transaction costs of a barter society.
There are many other ways of avoiding those costs without money. One is to have a social convention such that anyone with an abundance of some good should share it with anyone in need. Thus you share your surplus wool with whoever needs it, and somebody else shares a spare axe with you. Barter isn’t necessary at all.
There are less benign ways also. One is just to steal what you need. This could have violent repercussions, and we might say that these are transaction costs in themselves. But that is not obvious: the violence might be constrained through conventions to minimise its real damage. It might even be enjoyable for participants.
I am not entirely making things up; there are examples in the anthropological literature of societies that look a little like both of those, and there are many, many others of different sorts. But my point here is only that we shouldn’t assume we just know what our society would be like – given our psychological dispositions and our other conventions – if we took away money. Do we really know that much about ourselves?
The crucial point, of which anthropologists have been trying to inform economists for decades, is that the institution of money changes us in fundamental ways. It changes how we think, what we value, how we interact with each other. Untune the string of money and who knows what discord, or concord, might follow? Maybe we would barter; maybe we would share; maybe we would steal. How can we know? What is the standard of evidence for judging that counterfactual?
Once we appreciate the range of possibilities here, we see right away that there are many other functions that money could serve besides the three examined by Smit et al. The MMT story, for instance, is that money serves the purpose of allowing the state to provision the public sector with labour and capital, without paying in kind. I am working on my own story, drawing on Bernard Laum and René Girard, according to which money serves a religious purpose of channelling human violence into ritual channels. A certain type of Marxist believes that money is an instrument of exploitation.
All of these stories suggest a picture of a non-monetary society. The difference between that society and ours is the cost (to some or all members of society) that money exists to reduce. Without money we might have an inconvenient barter society, or no public sector, or uncontrolled violence, or the overthrow of capitalism. We can’t discuss the function that money serves without discussing which of these pictures seems the most accurate.
Economists don’t engage on this question at all. They just assert without argument that a society without money would be a barter society with high transaction costs. Philosophers follow them on this point, I believe, out of a misplaced “naturalism”. The economists can elaborate their barter-into-money story with fancy game theoretic models and equations. What is in fact an unsubstantiated assertion is dressed in the trappings of the natural sciences. And philosophers in the early 20C got a big scolding for failing to bow low enough to the natural sciences.
The remedy is simply to recognise that there is no current science that could tell us with any certainty what our society would look like if we just deleted one of its central institutions. Thinking through the possibilities takes imagination. Economists are often unimaginative – I often wonder if the explosion of unnecessary mathematics is to compensate for a lack of inspiration. But philosophers don’t need to follow suit. On one point, at least, we don’t want to vindicate J.K. Galbraith:
These are the days when men of all social disciplines and all political faiths seek the comfortable and the accepted; when the man of controversy is looked upon as a disturbing influence; when originality is taken to be a mark of instability; and when, in minor modification of the original parable, the bland lead the bland.