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Bob Murphy on Carl Menger's "origin of money"
Quote:
Everyone recognizes the benefits of a universally accepted medium of exchange. But how could such a money come into existence? After all, self-interested individuals would be very reluctant to surrender real goods and services in exchange for intrinsically worthless pieces of paper or even relatively useless metal discs. It's true, once everyone else accepts money in exchange, then any individual is also willing to do so. But how could human beings reach such a position in the first place?
One possible explanation is that a powerful ruler realized, either on his own or through wise counselors, that instituting money would benefit his people. So he then ordered everyone to accept some particular thing as money.
There are several problems with this theory. First, as Menger pointed out, we have no historical record of such an important event, even though money was used in all ancient civilizations. Second, there's the unlikelihood that someone could have invented the idea of money without ever experiencing it. And third, even if we did stipulate that a ruler could have discovered the idea of money while living in a state of barter, it would not be sufficient for him to simply designate the money good. He would also have to specify the precise exchange ratios between the newly defined money and all other goods. Otherwise, the people under his rule could evade his order to use the newfangled "money" by charging ridiculously high prices in terms of that good.
Menger's theory avoids all of these difficulties. According to Menger, money emerged spontaneously through the self-interested actions of individuals. No single person sat back and conceived of a universal medium of exchange, and no government compulsion was necessary to effect the transition from a condition of barter to a money economy.
In order to understand how this could have occurred, Menger pointed out that even in a state of barter, goods would have different degrees of saleableness or saleability. (Closely related terms would be marketability or liquidity.) The more saleable a good, the more easily its owner could exchange it for other goods at an "economic price." For example, someone selling wheat is in a much stronger position than someone selling astronomical instruments. The former commodity is more saleable than the latter.
Notice that Menger is not claiming that the owner of a telescope will be unable to sell it. If the seller sets his asking price (in terms of other goods) low enough, someone will buy it. The point is that the seller of a telescope will only be able to receive its true "economic price" if he devotes a long time to searching for buyers. The seller of wheat, in contrast, would not have to look very hard to find the best deal that he is likely to get for his wares.
Already we have left the world of standard microeconomics. In typical models, we can determine the equilibrium relative prices for various real goods. For example, we might find that one telescope trades against 1,000 units of wheat. But Menger's insight is that this fact does not really mean that someone going to market with a telescope can instantly walk away with 1,000 units of wheat.
Moreover, it is simply not the case that the owner of a telescope is in the same position as the owner of 1,000 units of wheat when each enters the market. Because the telescope is much less saleable, its owner will be at a disadvantage when trying to acquire his desired goods from other sellers.
Because of this, owners of relatively less saleable goods will exchange their products not only for those goods that they directly wish to consume, but also for goods that they do not directly value, so long as the goods received are more saleable than the goods given up. In short, astute traders will begin to engage in indirect exchange. For example, the owner of a telescope who desires fish does not need to wait until he finds a fisherman who wants to look at the stars. Instead, the owner of the telescope can sell it to any person who wants to stargaze, so long as the goods offered for it would be more likely to tempt fishermen than the telescope.
Over time, Menger argued, the most saleable goods were desired by more and more traders because of this advantage. But as more people accepted these goods in exchange, the more saleable they became. Eventually, certain goods outstripped all others in this respect, and became universally accepted in exchange by the sellers of all other goods. At this point, money had emerged on the market.
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so money = a universally accepted medium of exchange.
See my previous post about why gold has a lot of things going for it to become 'money'. |