Thursday, January 5, 2012

Menger on the Origin of Money

Carl Menger (1840-1921), the founder of Austrian economics, wrote this classic paper:
Menger, C. 1892. “On the Origin of Money,” Economic Journal 2: 238–255.
Menger imagines a world without money. In this world, people exchange goods for goods in spot transactions (barter). What happens when person A wants a good from person B, but the latter does not want the goods the former has to trade? This is the famous problem of the double coincidence of wants.

Menger notes that commodities have “different degrees of saleableness,” and that money has a virtually unlimited saleableness (Menger 1892: 242–243). Yet the differences of degrees of saleableness apply to many other commodities. Many goods once bought cannot be sold again except at a loss (Menger 1892: 244).

What do you do with your excess goods once you have obtained what you immediately want in a barter exchange? What do you do if you are unable to obtain what you want through a direct barter spot transaction? It makes sense for you to obtain goods with a high degree of saleableness, and then exchange these in the wider community at present or in the future. By this process, the most saleable good (or goods) becomes the medium of exchange (Menger 1892: 249).

I find it curious that even Menger makes this concession at the beginning of the following important paragraph:
“It is not impossible for media of exchange, serving as they do the commonweal in the most emphatic sense of the word, to be instituted also by way of legislation, like other social institutions. But this is neither the only, nor the primary mode in which money has taken its origin. This is much more to be traced in the process depicted above, notwithstanding the nature of that process would be but very incompletely explained if we were to call it ‘organic,’ or denote money as something ‘primordial,’ of ‘primaeval growth,’ and so forth. Putting aside assumptions which are historically unsound, we can only come fully to understand the origin of money by learning to view the establishment of the social procedure, with which we are dealing, as the spontaneous outcome, the unpremeditated resultant, of particular, individual efforts of the members of a society, who have little by little worked their way to a discrimination of the different degrees of saleableness in commodities.” (Menger 1892: 250).
Menger concludes that precious metals have arisen as a medium of exchange among many peoples because “their saleableness is far and away superior to that of all other commodities” (Menger 1892: 252). Yet Menger also recognises the “important functions of state administration” in creating coinage and creating public confidence in the “genuineness, weight, and fineness” of coined money (Menger 1892: 255). Another important point is that Menger held that the government reduces the uncertainty associated with “several commodities serving as currency” by legal recognition of some commodities as money, or where more than one commodity money exists by fixing a definite exchange ratio between them (Menger 1892: 255). In this way, governments have perfected precious metals in their function as money (Menger 1892: 255).

There are a number of problems with Menger’s paper, as follows:
(1) The flawed assumption running through the paper is that a money-less human society would be one where goods are obtained to a significant extent by barter spot transactions. This is clear in the hypothetical scenario Menger (1892: 241–243) envisages early in his paper.

It is perfectly possible that money might have arisen this way, but it is quite another thing to say that it can only ever have arisen in this way, and in no other way. The Austrians have a militant position on the origin of money that appears to me to go well beyond what Menger said in this 1892 article. For modern Austrians,
“[sc. Mises’s] Regression Theorem also shows that money, in any society, can only become established by a market process emerging from barter. Money cannot be established by a social contract, by government imposition, or by artificial schemes proposed by economists.” (Rothbard 2009: 61).
Yet it appears to me that Menger explicitly rejects this idea here:
“It is not impossible for media of exchange, serving as they do the commonweal in the most emphatic sense of the word, to be instituted also by way of legislation, like other social institutions. But this is neither the only, nor the primary mode in which money has taken its origin.” (Menger 1892: 250).
That seems to leave some room in Menger’s view for government law to establish money.

It is obvious that the historical origin of money cannot be traced to one moment of invention in the past: for there have undoubtedly been multiple independent instances in history where things have emerged as a unit of account and medium of exchange in different societies in different times. It is far more likely that the origins of money are complex. Here history and anthropology matter: the idea that you can sit in an armchair and use deduction to obtain apodictic certainty about how some complex social practice arose in the past is nonsensical. Empirical evidence and inductive reasoning are clearly important.

The obsession with barter spot transactions seen in Menger ignores another fundamental relation: the existence of debt/credit transactions (which might even be construed as reciprocal gift giving). As David Graeber argues,
“[the] great flaw of the economic model is that it assumed spot transactions. I have arrowheads, you have beaver pelts, if you don’t need arrowheads right now, no deal. But even if we presume that neighbors in a small community are exchanging items in some way, why on earth would they limit themselves to spot transactions? If your neighbor doesn’t need your arrowheads right now, he probably will at some point in the future, and even if he won’t, you’re his neighbor—you will undoubtedly have something he wants, or be able to do some sort of favor for him, eventually. But without assuming the spot trade, there’s no double coincidence of wants problem, and therefore, no need to invent money.

... What anthropologists have in fact observed where money is not used is not a system of explicit lending and borrowing, but a very broad system of non-enumerated credits and debts. In most such societies, if a neighbor wants some possession of yours, it usually suffices simply to praise it (‘what a magnificent pig!’); the response is to immediately hand it over, accompanied by much insistence that this is a gift and the donor certainly would never want anything in return. In fact, the recipient now owes him a favor. Now, he might well just sit on the favor, since it’s nice to have others beholden to you, or he might demand something of an explicitly non-material kind (‘you know, my son is in love with your daughter...’) He might ask for another pig, or something he considers roughly equivalent in kind. But it’s almost impossible to see how any of this would lead to a system whereby it’s possible to measure proportional values.”
David Graeber, “On the Invention of Money – Notes on Sex, Adventure, Monomaniacal Sociopathy and the True Function of Economics. A Reply to Robert Murphy’s ‘Have Anthropologists Overturned Menger?,’” September 13, 2011.
In theory, one could even transfer debts/IOUs and obtain commodities in this way.

Most probably, money has emerged in complex ways:
(1) from debt/credit transactions and transfers of IOUs;

(2) from wergild-like social practices (e.g., some Medieval societies),

(3) from government-based designation of a unit of account and the demand for taxes measured in that unit of account (e.g., ancient Mesopotamia; see below), and

(4) barter between strangers and in international trade. The cacao money of Mesoamerica and the salt money of Ethiopia may well be instances of money emerging through barter (Graeber 2011: 75). However, in long distance trade, barter transactions might have led to the origin of money in the sense of a money of account (to measure the value of other commodities), but even here may not have widely functioned as a medium of exchange.
As Graeber notes, money in the sense of a money of account (as a measure of value of commodities) can very probably emerge before the medium of exchange role.

And in actual human societies (whether small hunter gatherer or agricultural communities, or larger tribe/group communities with more complex economic organisation with greater division of labour), the way goods are obtained and distributed may be by open-ended sharing, centralized allocation (e.g., Iroquoi allocation of goods by women’s councils), “gift exchange,” where a present good is exchanged for the social obligation of a future “gift,” even though there does not need to be exact value equivalence. Social relations complicate even this “gift exchange” economy: some people may not even bother to call in the gifts owed to them, they might accept something of lesser value in the end. Such money-less societies can persist for centuries, with barter spot transactions remaining insignificant or confined to external transactions with strangers.

The emergence of money from such arrangements appears to have much to do with the legal or social systems of penalties and fines for crimes, injuries or slights. It was here that things – prized things – were used to measure value, in the sense of compensation for injury.

The origin of money in ancient Mesopotamia appears to be in the development of an abstract money of account in the temple and palace institutions: these temples and palaces represented state institutions with large internal centrally planned economies, with complex weights and measurements for internal accounting of the products produced, received and distributed, and rent and interest owed. Many prices were set and administered in the money of account which developed from weight units. The two units of account were (1) the shekel of silver (which was equal to the monthly grain ration) and (2) barley. In the private economy, exchange involved a high degree of credit/debt transactions or “gift exchange,” not simply barter in spot transactions (Hudson 2004: 102). Silver money of account spread to the private economy mostly notably as a means of paying debts to temples and palaces (Hudson 2004: 115). But many ordinary people could pay in commodities, and the administered pricing system in terms of silver/grain developed in the temples was to assist in calculation of payments in kind.

(2) Menger holds that precious metals emerged as the medium of exchange for their “special saleableness.” He thinks that no “accident, nor the consequence of state compulsion, nor voluntary convention of traders effected this” (Menger 1892: 254). This seems to contradict his statement on p. 250 (cited above).

In fact, Menger’s view is highly questionable, since metals were not especially divisible or used in uniform divisible units until the invention of coinage. Most bullion and metal would have been of too high a value for ordinary transactions. The historical origin of coinage in Western civilization lies with the state:
“the state’s role in the development of coinage is undisputed … Coinage was not an endogenous development of the economic sphere, as Menger held, nor was it created merely in order to facilitate trade which had existed thousands of years before money and was in no need of facilitation” (Peacock 2006: 642).
To be fair to Menger, he did not assert that coinage “was an endogenous development of the economic sphere.” What Menger believed is that precious metal as commodity money (not necessarily coined) emerged because of its “special saleableness.” But this is not necessarily true, because precious metal was unlikely to have been used in daily, ordinary transactions by common people before small unit coins. Coins were the creation of the state, and even the early coins were minted in denominations far too high for small transactions (Kraay 1964). The reason that coinage eventually became a widely-accepted medium of exchange and unit of account was that the state demanded its issued coin back for payment of taxes and other payments to the state, such as harbour dues and fines. This process is what monetized the economy and encouraged the use of coinage as a medium of exchange. This is essentially the Chartalist explanation of monetised economies.
We can end by noting that, in contrast to the cultish, dogmatic assertions of Rothbard (2009: 61), Menger recognised that the state improved the effectiveness of money through issuing coinage, and in fixing exchange ratios between commodity money. He also allowed that a medium of exchange might be instituted by way of government legislation (Menger 1892: 250).

UPDATE
I will also look at Menger’s Principles of Economics (1st edn. 1871) in the section on money, but I think most of the criticisms above will also apply to it.

DAVID GRAEBER LINKS

Graeber, David, 2009. “Debt: The First Five Thousand Years,” Eurozine.com, 20th August.

“What is Debt? – An Interview with Economic Anthropologist David Graeber,” August 26, 2011.

Robert Murphy, “Murphy Replies to David Graeber on Menger and Money,” Mises.org, September 8, 2011.

David Graeber, “On the Invention of Money – Notes on Sex, Adventure, Monomaniacal Sociopathy and the True Function of Economics. A Reply to Robert Murphy’s ‘Have Anthropologists Overturned Menger?,’” September 13, 2011.

BIBLIOGRAPHY

Graeber, David. 2011. Debt: The First 5,000 Years, Melville House, Brooklyn, N.Y.

Hudson, M. 2004. “The Archaeology of Money: Debt Versus Barter Theories of Money’s Origins,” in L. R. Wray (ed.), Credit and State Theories of Money: the Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham. 99–127.

Kraay, C. M. 1964. “Hoards, Small Change and the Origin of Coinage,” Journal of Hellenic Studies 84: 76–91.

Menger, Carl, 2007. Principles of Economics (trans. Grundsätze der Volkwirthschaftslehre [1st edn. 1871] by J. Dingwall and B. F. Hoselitz), Ludwig von Mises Institute, Auburn, Alabama.

Menger, C. 1892. “On the Origin of Money,” Economic Journal 2: 238–255.

Murphy, Robert P. 2003. “The Origin of Money and Its Value,” Mises Daily, September 29, 2003
http://mises.org/daily/1333


Peacock, M. S. 2006. “The Origins of Money in Ancient Greece: The Political Economy of Coinage and Exchange,” Cambridge Journal of Economics 30: 637–650.

Rothbard, M. N., 2009, The Essential von Mises, Ludwig von Mises Institute, Auburn, Alabama.

22 comments:

  1. Graeber’s amorphous and individualized debt-based exchanges are entirely consistent with basic Austrian concepts and describe subjective values that cannot be and are not expressed until the transaction ultimately occurs. If Austrian-influenced historians have missed that chapter of history, it says nothing about basic Austrian concepts.

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  2. What "basic concepts" would these be?

    The idea that all (non-mentally ill) human voluntary action is purposeful? That is a concept so trivial that it can be accepted by all economic schools, even Marxists.

    The Austrian definitions of "barter," "credit," "subjective value," or "debt" are not fundamentally different from the neoclassical/Keynesian definitions, so all you're really saying is that what I have said above is consistent with basic economic concepts held by all economists.

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  3. You should read Menger's Principles. Far more complete than the essay.

    "What Menger believed is that precious metal as commodity money (not necessarily coined) emerged because of its “special saleableness.” But this is not necessarily true, because precious metal was unlikely to have been used in daily, ordinary transactions by common people before small unit coins."

    To be fair, Menger is not overly focused on precious metals. Copper is the metal he points out would be used by common people and in small denomination transactions.

    "He also allowed that a medium of exchange might be instituted by way of government legislation"

    No, Menger was always a thoroughgoing metallist. Read the last paragraph:

    "Money has not been generated by law. In its origin it is a social, and not a state institution. Sanction by the authority of the state is a notion alien to it. On the other hand, however, by state recognition and state regulation, this social institution of money has been perfected and adjusted to the manifold and varying needs of an evolving commerce, just as customary rights have been perfected and adjusted by statute law."

    Read the last paragraph of the last appendix of his Principles:

    "I refer to the observation that the character of money as an industrial metal often completely disappears from the consciousness of economizing men because of the smoothness of operation of our trading mechanism, and that men therefore only notice its character as a means of exchange. The force of custom is so strong that the ability of a metal used as money to continue in this role is assured even when men are not directly aware of its character as an industrial metal. This observation is entirely correct. But it is also quite evident that the ability of a material to serve as money, as well as the custom on which this ability is founded, would disappear immediately, if the character of money as a material applicable to industrial purposes were destroyed by some accident. I am ready to admit that, under highly developed conditions of trade, money is regarded by many economizing men only as a token. But it is quite certain that this illusion would immediately be dispelled if the character of coins as quantities of industrial raw materials were lost."

    So while Menger believed that the state might adopt metals as money, it could not legislate into existence a worthless item as money. The state could construct a system of coinage and thereby perfect an existing metallic monetary system, but not create a system based on intrinsically worthless materials.

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  4. You should read Menger's Principles. Far more complete than the essay.

    Which edition?

    There are two. I assuming you are using this:

    Menger, Carl, 2007. Principles of Economics (trans. Grundsätze der Volkwirthschaftslehre [1st edn. 1871] by J. Dingwall and B. F. Hoselitz), Ludwig von Mises Institute, Auburn, Alabama.

    This is a transation of the 1st edn. from 1871. So this book was written before C. Menger, 1892. “On the Origin of Money,” Economic Journal 2: 238–255.

    The 2nd revised and (apparently) expanded edn. of Menger's Principles of Economics was published in 1923, but this does not appear to be available in English.

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  5. "The state could construct a system of coinage and thereby perfect an existing metallic monetary system, but not create a system based on intrinsically worthless materials."

    This is also contradicted by the empirical evidence from history:

    "Typically, the money-thing issued by the authorities was not gold-money nor was there any promise to convert the money-thing to gold. Indeed, as Innes insisted, throughout most of Europe’s history, the money-thing issued by the state was the hazelwood tally stick: “This is well seen in medieval England, where the regular method used by the government for paying a creditor was by ‘raising a tally’ on the Customs or on some other revenue getting department, that is to say by giving to the creditor as an acknowlegement of indebtedness a wooden tally.” (1913, p. 398) Other money-things included clay tablets, leather and base metal coins, and paper certificates. Why would the population accept otherwise “worthless” sticks, clay, base metal, leather, or paper? Because the state agreed to accept the same 'worthless' items in payment of obligations to the state.

    ...
    'The government by law obliges certain selected persons to become its debtors…. This procedure is called levying a tax, and the persons thus forced into the position of debtors to the government must in theory seek out the holders of the tallies or other instrument acknowledging a debt due by the government , and acquire from them the tallies by selling to them some commodity or in doing them some service, in exchange for which they may be induced to part with their tallies. When these are returned to the government treasury, the taxes are paid. How literally true this is can be seen by examining the accounts of the sheriffs in England in the olden days. They were the collectors of inland taxes, and had to bring their revenues to London periodically. The bulk of their collections always consisted of exchequer tallies, and though, of course, there was often a certain quantity of coin, just as often there was, one at all, the whole consisting of tallies.' (1913 p. 398)"


    L. Randall Wray, Credit and state theories of money: the contributions of A. Mitchell Innes, p. 245.

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  6. I use the Mises edition.

    "This is also contradicted by the empirical evidence from history."

    That may be the case, but Menger is a pure metallist, he doesn't have a drop of chartalism in his blood.

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  7. Did you know that Menger published a 110 page article on money for the Handwörterbuch der Staatswissenschaften (Dictionary of the Social Sciences), in 1892? There is no english translation out there. The short article "On the Origins of Money" you have commented on is derived from this larger article. There is definitely a lack of good translations of Menger.

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  8. The idea that all (non-mentally ill) human voluntary action is purposeful? That is a concept so trivial that it can be accepted by all economic schools, even Marxists.

    The central Austrian concept is the pervasive IGNORANCE of individual human beings. Nobody knows what anyone else is thinking and the only way to get some grip on what they are thinking and “demanding” is through unadulterated free market prices. Socialism abolishes those prices and Keynesian policies DISTORT them. How that distortion plays out is a question of fact. Government officials are just dumb humans like everyone else and operate almost as blindly under Keynesianism as under a Soviet system of price abolition. The job of the Keynesian in this debate is to provide evidence that government officials a priori have some type of special knowledge that allows them to plan the lives of the mundanes that the Austrians insist such officials do not and can never have. THAT IS THE CENTRAL AUSTRIAN CONCEPT.

    Further, all that is meant by a natural rate of interest or equilibrium pricing are those interest rates and prices that would obtain in the unadulterated market. Nothing more, nothing less. As Hayek said in 1975*:

    The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured.

    Those are the simple basic concepts that you and all the other anti-Austrians refuse to comprehend.

    *A Discussion With FRIEDRICH A. VON HAYEK
    Held at the American Enterprise Institute on April 9, 1975

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  9. "The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. ...."

    Then the old fool Hayek is still invoking non-existent neoclassical equilibrium ideas even in 1975.

    Yet Hayek stated quite clearly that equilibrium states do not exist in the real world, and even abandoned the concept completely:

    “It is tempting to describe as an “equilibrium” as ideal state of affairs in which the intentions of all participants precisely match and each will find a partner willing to enter into the intended transaction. But because for all capitalist production there must exist a considerable interval of time between the beginning of a process and its various later stages, the achievement of an equilibrium is strictly impossible. Indeed, in a literal sense, a stream can never be in equilibrium, because it is disequilibrium which keeps it flowing and determining its directions.

    Hayek quoted in Caldwell, B. 2004. Hayek’s Challenge: An Intellectual Biography of F.A. Hayek, University of Chicago Press, Chicago and London. pp. 226–227.

    In Nobel Prize-Winning Economist: Friedrich A. von Hayek (1983, pp. 187-188):

    “HIGH: To what extent do you think that general-equilibrium analysis has contributed to the belief that national economic planning is possible?

    HAYEK: It certainly has. To what extent is very difficult to say. Of the direct significance of equilibrium analysis to the explanation of the events we observe, I never had any doubt, I thought it was a very useful concept to explain a type of order towards which the process of economics tends without ever reaching it. I’m now trying to formulate some concept of economics as a stream instead of an equilibrating force, as we ought, quite literally, to think in terms of the factors that determine the movement of the flow of water in a very irregular bed.

    ----------------

    And there is no "actual structure of prices and wages from its equilibrium structure" to full employment - that is a myth.

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  10. "Those are the simple basic concepts that you and all the other anti-Austrians refuse to comprehend.

    You utter idiot: equilibrium and equilibrating markets - where a fully flexible system of prices and wages can create full employment - are Walrasian neoclassical ideas.

    This kind of gross ignorance doesn't do much for your argument.

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  11. "The central Austrian concept is the pervasive IGNORANCE of individual human beings. .... etc etc.

    And these comments are red herrings, with respect to this post.

    (1) the point of this post to refute Menger's view of the barter origin of money.


    (2) the truth of ABCT or the Mises/Hayek socialist calculation critique is NOT relevant to the question of the barter origin of money.

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  12. Why should the public believe an economist who says his subject can't even be measured? That sounds like mere market apologetics -- not that you'd expect much more from an 'Austrian' economist.

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  13. Why should the public believe an economist who says his subject can't even be measured? That sounds like mere market apologetics

    Well Hank, I ask, how are prices measured then?

    In a world of changing disequilibrium, that is the reality of this world, and therefore, in a world where prices of goods are never in equilibrium, how does it make sense to aggregate these up? This is the basic point of Lachmann's book Capital and It's Structure and these questions have to be taken into consideration.

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  14. "In a world of changing disequilibrium, that is the reality of this world, and therefore, in a world where prices of goods are never in equilibrium, how does it make sense to aggregate these up?

    You don't simply "aggregate" prices: you select a basket of goods that many people DO in fact consume, then calculate an average comparing the averages over time. No one asserts that this is a perfect measure of the price level - the question is: does it convey meaningful information on how much people have to spend on a given basket of goods from their income over time.

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  15. But if we are talking about Capital goods, isn't what you just said irrelevant?

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  16. We are talking at crossed purposes - I read your comment and thought you are talking of a CPI. Apologies.

    Yes - there are problems with aggregating capital goods. This was one of points of the Cambridge capital controveries.

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  17. I do not get why it is inaccurate to use aggregated capital but ok to use aggregate consumer goods. Why doesnt the same apply to consumer goods ?

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  18. The problem was the neoclassical aggregate production function using homogeneous capital as an assumption. In essence, it is the aggregation of capital goods as though they are homogeneous that was the issue.

    The aggregation of the sale price of consumer goods in money terms in one year is a different thing: we know such goods are heterogeneous.

    If you couldn't, say, meaningfully aggregate the value of sales of heterogeneous goods in one year for a firm, how could a firm calculate its total income from sales?

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  19. Ok but what about the disequilibrium issue that Issac brings up? At least how I understood it, one cannot aggregate the price of a good in disequilibrium.

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  20. "The central Austrian concept is the pervasive IGNORANCE of individual human beings. Nobody knows what anyone else is thinking and the only way to get some grip on what they are thinking and “demanding” is through unadulterated free market prices."

    So although people in an 'Austrian' world cannot talk to one another to ask such questions they understand the concept of price. What a strange set of ideas.

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  21. "Ok but what about the disequilibrium issue that Issac brings up? "

    This is about the expected future yield/value of a capital good being difficult to calculate ex ante, because that expected future value is subjective.

    The value, in monetary terms, of the actually sold items - say, consumer goods - in a time period x is not subejctive, is it.

    It is quite clearly an objective figure, which you can aggregate, say in aggregate consumption spending as in GDP.

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