Money, part1.
Natural
money, centralized creation, sub-optimality and self-organizing processes
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.”
Carl Menger
“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.
