Author: Pablo Paniagua
“Some social phenomena are the results of a common will directed toward their establishment, while others are the unintended result of human efforts aimed at attaining essentially individual goals; but are the unintended result of them. In this case, social phenomena come about as the unintended result of individual human efforts (pursuing individual interests) without a common will directed toward their establishment.”
“An extended order is a system in which far surpasses the reach of our understanding, wishes and purposes, and our sense perceptions, and that which incorporates and generates knowledge which no individual brain, or any single organization, could possess or invent.”
Friedrich A. von Hayek
“Reason leads intellectuals to ignore the theoretical limits of reason, to disregard a world of historical and scientific information, to remain ignorant of the biological sciences and the sciences of man such as economics, and to misrepresent the origin and functions of our traditional moral rules.”
Friedrich A. von Hayek
The organic origin of money as a medium of exchange:
Money is probably one of the most useful and fundamental but yet less understood institutions that human societies have ever come to employ in history. The main difficulty in fully appreciating and understanding its power and complexity comes from the trouble in comprehending its natural origin and spontaneous evolution. Social institutions such as money, languages and many other systems that are shaped through evolution, are self-organizing, thus not fully planned and projected through human reason. This implies a huge problem since paradoxically we use the institution of money intensively, but since we did not fully plan or design it, it faces difficulties grasping its own existence and evolution.
The fact that the social institution of money was not fully planned has made the whole idea of a specific origin or a precise birthdate unfeasible and puzzling to economists for hundreds of years. It wasn’t until Carl Menger applied his Individualistic methodology to understand the evolution of money as a social institution that we became aware of the benefits of natural institutions that are constructed only through evolutionary individual interactions and not through planning. His methodology has helped us understand individual interactions and the relevance of unplanned complex systems that are beneficial for societies and most importantly, lie outside any possibility of being completely designed through human thinking.
We can recognize that humans have taken the first step towards sustainable and immeasurable economic growth, but it happened only when people started adopting a particular skill and then continued to improve their dexterity within that particular job. This was a way of creating a skill advantage in respect to others. Eventually, that job or skill was offered in the form of a service or manufactured product. Through a form of any mutually beneficial exchanging of goods, it became necessary to use the good as a mechanism to enhance exchange. Thus medium of exchanges are inherent in the division of labor and play an important role in the market society and in its evolution.
When humans started producing certain goods in order to participate in voluntary exchanges, they had to bear a high level of uncertainty while calculating the short-term demand for their products. This led producers to hold some finished goods in stock or cellars in order to have spares to exchange when needed. This stock enabled them to meet sudden demand changes in the near future, therefore successfully counterbalancing the uncertainty. Menger defined these sorts of stocked products ready for future sales as ‘commodities’. This meant that the artisan would have some part of his wealth translated from a stocked good since it was ready to be exchanged for another good which he may have considered more valuable. Primitive civilization then started producing goods as a way of applying their skills and best knowledge. The small division of labor within their villages was a way of increasing their personal production of certain goods that might have been used as a commodity for exchange or as a portion of personal wealth ready to be exchanged for others goods possibly vital to their existence. Menger noticed however that the commodity-character of any good of being exchangeable for other goods is not inherent in the produced good itself: it is not an intrinsic property of it, it is just a relationship between the good produced and the person willing to exchange it for another good. Therefore any form of acceptable good as a medium of exchange has a value based on its exchange value rather than its use value.
Even if the producer or owner is willing to exchange, the use of his good as an exchangeable good (i.e. using it as a commodity) and its ease will be limited: his ability for possible exchanges in society are restricted by the limited marketability of the good he produced. Individuals will accept his good or not depending on certain characteristics that make some goods more marketable than others. Therefore the marketability of goods being used as commodities, as Menger established, will be limited by several factors: to whom and where it can be sold, if it has an expiration, how long it can be stored for, and how long the producer must wait before finding someone willing to buy it.
As a result of the heterogeneity of goods produced, there will be some goods that may expire and cannot being stocked for a long time, i.e. milk; some others cannot be divisible for a proper exchange, i.e. live cattle; additionally, others are not going to be accepted as a general medium of exchange or are going to be hard to transport to other countries, i.e. fruits, and therefore limited due to transportation. So then how do we decide which goods can be used as reliable mediums of exchange for the good of society? How do we establish the best possible commodity for the whole civilization? The answer of course, like many other complex social institutions, relies beyond one single person’s possible reasoning and planning. Menger indeed demonstrated that only the free spontaneous interaction and exchange of goods among individuals will eventually and evolutionary result in a feasible solution. Since it is evolutionary and individually adopted, this solution will naturally be optimal; it will certainly not be planned by anyone and consequently it will determine a common commodity. This will circulate with ease and will be freely accepted by people in order to easily exchange.
Thus individuals in a market economy bring their “best” commodities or goods to the exchange market; those having some particular degree of marketability will compete against others to become the more accepted medium of exchange. Individuals bring their personal products, with the obvious intentions of exchanging them, not only for the specific good that they want to consume now, but also for some other forms of more marketable commodities. Even if the person did not need or want the more marketable commodity at the moment, individuals understood that this exchange for the more marketable commodity will indirectly enhance and facilitate further transactions for them and that eventually it will help them to reach their goals and economic interests. Thus without any form of legislative compulsion, without any consideration of the common public interest, even without imposing a commodity as an official medium of exchange, individuals will lead to the use of the most marketable commodity for transactions based on their necessity and based on their individualistic interests. This individual adoption will lead to the use of the most marketable commodity for transactions and therefore everyone in society will spontaneously start adopting the most marketable commodity as a form of money.
The noncoercive, decentralized process of self-organizing interactions of individuals being held in exchanges will come with a generally feasible solution. The outcome is spontaneously and freely adopted by people and of course will be individually optimal. Adopting this solution can eventually be transmitted to other individuals and become the best possible outcome for a complex society. As Menger stated,
“As each economizing individual becomes increasingly more aware of his economic interest, he is led by this interest, without any agreement, without legislative compulsion, and even without regard to the public general interest, to give his commodities in exchange for others, more saleable, commodities, even if he does not need them for immediate consumption purpose”.
Consequently with increasing economic development (being the number of spontaneous exchanges and individual interactions), artisans and producers will naturally prefer to exchange their goods for a more marketable commodity for eventual future transactions. The exchange is mutually beneficial since the artisan will indirectly possess a more marketable commodity that will help him to achieve his future ends and the consumer will buy the artisan’s good in order to satisfy his consumption. These sorts of commodities which were widely accepted and marketable were called “Geld”, originating from the German word “Gelden” which means to compensate or to pay. Therefore “Geld” became the expression for payment or money. This evaluative process, in which individuals were immersed in collaboration and interaction, trying different forms of commodities as Geld, ended up with the spontaneous selection of the single most marketable commodity available for the society; this is the way money originated. Soon after the adoption of commodity money, the state took control of coinage and then eventually started issuing paper money. This was 100% backed by a commodity as a way of compromising and keeping paper money inelastic. The system also allowed money to be completely backed by gold while simultaneously being easier to circulate than gold coins.
As we have seen through Menger’s insight, money’s origin and evolution is just another form of spontaneous order and individualistic interaction that ended in a natural outcome. Money is not a state invention nor was it created by politicians or any monetary central authority. As Menger stated, “Certain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the state.” Different sorts of money will spontaneously appear in societies depending on the level of economic development and depending on the goods and materials available for each society; therefore money has independently existed in various ways in different civilizations.
In basic barter economies, a primitive form of money seems to first appear as cattle due to being the most commercial and most marketable commodity in the ancient world. Greeks showed no trace of coined money even as late as Homer’s time: prices were all reckoned in cattle. Even the Roman Empire used sheep as a means of exchange and therefore as a form money until very late in its reign. Finally when economic development and the extended division of labor and cooperation among civilizations geographically extended to farther places, this spontaneously diminished cattle’s marketability and started increasing that of other commodities which were more suitable for long distances, such as metals. Metals presented better marketability characteristics than cattle and therefore were a better medium of exchange for an extended, complex economy. They had better transportability, including taking up narrower spaces, longer durability and better divisibility.
The Mengerian theory about the evolution of money necessarily presupposes the idea of goods’ marketability in a free-market. In this line of thinking, money possesses nearly unrestricted marketability. Therefore this evolving process happens within all human societies without any form of centralized decisions or any form of applicable reasoning; it is the evolution of a self-organized institution. As Menger noticed, “money presents itself to us, in its special locally and temporally different forms, not as the result of a political agreement, legislative compulsion, or mere chance, but as the natural product of differences in the economic situation of different peoples at the same time.”
The concluding remarks of the origin of money should be evident now since we have seen that such a complex and beneficial institution is not originated through reason or created by any centralized authority; more impressively, it was not even conceived to be beneficial for the good of the society. Individuals' self-creating process, coordination and exchange were originally aimed towards their personal satisfaction and interests; in the end, they indirectly helped what spontaneously started and continued money's social evolution and success of becoming one of the most relevant institutions for a free society. This spontaneity was simply formed through the evolution of a self-creating process of coordination and exchange of individuals that were first aimed only to specific individual goals, their own satisfaction and their own interest. With that simple idea, leaving individuals the liberty to decide what to use as a medium of exchange, societies can spontaneously create something beneficial for the whole civilization without even conceiving the idea or really thinking about or planning it. In Menger’s words,
“Organic social phenomena are characterized by the fact that they present themselves to us as the unintended result of individual efforts of members of society, i.e., of efforts in pursuit individual interests. Accordingly, in contrast to rational characterized social structures, these are, to be sure, the unintended social result of individual teleological factors.”
Menger considers this form of unintended social organization as natural. A natural social organism as Menger and Hayek intended it are in the sense of innate or instinctive structures, therefore the word “artificial” means a product of human design, basically based on knowledge and the planned use of reason.
The most successful social institutions paradoxically escape our possibility of planning and intervention. Since they are not planned, they challenge the limits of our human reason. Unfortunately we cannot create them artificially; they are always the unintended consequences of individual coordination. Money, the Rule of Law and Languages are therefore the unintended consequences of free individual interactions and individuals seeking to maximize their ends. Spontaneously-created systems result in outcomes such as Money. In the case established, they are defined as systems with minimum production cost to human efforts and combined with its spreading; this creates the greatest utility and benefits. Extraordinarily Money as a self-organizing evolutionary system was formed by individual activities and multiple exchanges. The outcome of money was unforeseeable and not specifically directed by anyone; its final outcome was the spontaneous social adoption of metals and the eventual coinage of metal coins as money. Finally the institution’s natural function of money is only that of facilitating the exchange process for individuals in a complex society. It indirectly has the positive function of facilitating economic calculations through natural prices for the entrepreneur.
Under the institution of money in a free market system, you don’t directly exchange the good you possess with other goods you desire but rather you exchange it for money, bringing you one step closer to achieving your end. You gain the prospect of accomplishing your purpose through an indirect exchange for the marketable commodity. The social institution of money has only been accomplished through the increasing knowledge of individual ends, regardless of any convention or legal compulsion, apart from any common social goal or interest.
The spontaneous formation of the most common and marketable commodity in a society has the unintended positive consequences of creating the best possible framework to promote and facilitate the price system and making price dissemination reliable and available. Money facilitates transactions and exchanges but more importantly, it enhances entrepreneurial and economic calculation through the price mechanism expressed in money’s value. Good money therefore promotes and facilitates the process of competition, price formation, as well as the most efficient and transparent framework for a healthy allocation of capital.
Naturally and spontaneously adopted money creates more stability in an un-politicized base for the price system to freely prosper from political interference. In a complex system with so many interactions and exchanges occurring in a decentralized manner, relative prices are the fundamental source of transmission for basic information. They send out the most relevant information that facilitates interactions, calculations and allows individuals to make entrepreneurial decisions. Therefore the price system fundamentally relies on some sort of natural and unique “language” in which the information can be revealed and disseminated to economic actors. The only possibility to communicate real information in an unadulterated and untainted fashion is through naturally adopted money because it has no political and centralized control whatsoever. Since it does not answer to particular interests, it does not create the opportunity for anyone to interfere with price dissemination. In this way, natural money is optimal and stays away from political control.
Natural money provides and disseminates factual and reliable information based on real entrepreneurial efforts and human relationships. State money or paper money systems backed on just the paper instead of sound commodities surpass and undermine the natural system of coordination in a free market economy. It alters and disturbs the true entrepreneurial information, distorting entrepreneurial actions with political and centralized nationalistic economic aims; the state money system and Fiat money bring massive uncovered distortions to the money institution and undermine the real objective of natural commodity money, replacing it with political and nationalist objectives.