On pp. 30–34, Mises gives us an account of the origin of money (see also Mises 1998 [1949]: 402–404). Mises distinguishes “direct exchange” from “indirect exchange”: direct exchange involves no medium of exchange; and indirect exchange involves money used as medium of exchange.
This is described by Mises in the following way:
“Suppose that A and B exchange with each other a number of units of the commodities m and n. A acquires the commodity n because of the use-value that it has for him. He intends to consume it. The same is true of B, who acquires the commodity m for his immediate use. This is a case of direct exchange.” (Mises 2009 [1953]: 30).It is clear that Mises – like other Classical and neoclassical economists – imagines barter spot transactions (or direct and immediate exchange of goods for goods) in his account of the origin of money. This is evident in Mises’s words “for his immediate use”: if two people have exchanged present goods for immediate use, then no exchange of present for future goods (a credit/debt exchange) is imagined here. The barter spot trade is the foundation of Mises’s account of the origin of money.
Mises then asserts that the most marketable goods will become the common media of exchange, and eventually the number of such media will probably be reduced, and in theory to one (Mises 2009 [1953]: 32). Mises recognised two such fundamental media at the time The Theory of Money and Credit was originally written (1912): gold and silver (Mises 2009 [1953]: 33).
Mises’s account of the origin of money is subject to the same criticisms as that of Menger and others I have outlined here:
“Menger on the Origin of Money,” January 5, 2012.In short, the gapping hole in the imagined origin of money by Adam Smith, Carl Menger, Ludwig von Mises and many modern neoclassical economists is the assumption that money-less, primitive human societies come to have economies dominated by barter spot transactions (that is, by barter through spot trades).
“The Origins of Money,” January 8, 2012.
Anthropology, however, shows us that many money-less societies do not need to be based fundamentally on barter, and that they are capable of often evading the immediate double coincidence of wants problem by engaging in credit/debt transactions. In many societies, this takes the form of the gift exchange economy. In primitive human societies, the mutual giving of “gifts,” a type of debt/credit relation (Mauss 2002: 46), appears to be very important, and this incorporates social relations as well as commodities (the gift exchange economy bears some similarity to Peter Kropotkin’s notion of “mutual aid”).
While there appear to be instances where a medium of exchange has emerged from long distance trade, such as the cacao money of Mesoamerica and the salt money of Ethiopia (Graeber 2011: 75), money can arise in other ways:
(1) a unit of account can be developed by temple and palace complexes from weight units (as in ancient Egypt and Mesopotamia), and“Money” in the sense of a money of account (as a measure of value of commodities) can emerge before the medium of exchange role.
(2) money might emerge from wergild-like social practices (e.g., some Medieval societies).
Mises’s Austrian approach to money is flawed by focussing on money’s medium of exchange role, and the belief that this must always come first. It is also flawed by its inability to account for money having arisen by ways other than barter spot trades.
BIBLIOGRAPHY
Bell, D. 1991. “Modes of Exchange: Gift and Commodity,” Journal of Socio-Economics 20.2: 155–167.
Graeber, David. 2011. Debt: The First 5,000 Years, Melville House, Brooklyn, N.Y.
Mauss, Marcel. 2002. The Gift: The Form and Reason for Exchange in Archaic Societies (trans. W. D. Halls), Routledge, London.
Mises, L. von. 1998 [1949]. Human Action: A Treatise on Economics. The Scholar’s Edition, Ludwig von Mises Institute, Auburn, Ala.
Mises, L. von. 2009 [1953]. The Theory of Money and Credit (trans. J. E. Batson), Mises Institute, Auburn, Ala.
The regression theorem is that money arises from barter. It's not necessary that barter be only spot or only credit.
ReplyDeleteIf societies traded goods for goods and/or on credit, after which a commodity arises to be used as money, then this is fully and totally consistent with the regression theorem.
It is false to say that Austrians focus too much on money as a medium of exchange. Money IS and ONLY IS a universal medium of exchange. Any commodity that performs any other function is not a money, but a "good."
"money can arise in other ways:"
"(1) a unit of account can be developed by temple and palace complexes from weight units (as in ancient Egypt and Mesopotamia),"
Goods cannot be "accounted for" in a money commodity unless that money commodity was first traded on barter and shown to be valuable.
"(2) money might emerge from wergild-like social practices (e.g., some Medieval societies)."
Those "social practises" of payments or fees for body restitution, are payments and fees in a commodity that MUST have already been valued and exchanged prior. Those paying the fees must have already known that commodity to be valuable in its own right, and that can't take place unless there are exchanges in that commodity for other commodities.
"“Money” in the sense of a money of account (as a measure of value of commodities) can emerge before the medium of exchange role."
That "unit of account" commodity must have already first been traded on (spot or credit) barter so that is known to have economic value as a unit of account.
"The regression theorem is that money arises from barter. It's not necessary that barter be only spot or only credit"
ReplyDeleteMises and other economists envisage barter spot transactons. That is perfectly clear from this opening statement by Mises:
“Suppose that A and B exchange with each other a number of units of the commodities m and n. A acquires the commodity n because of the use-value that it has for him. He intends to consume it. The same is true of B, who acquires the commodity m for his immediate use. This is a case of direct exchange.” (Mises 2009 [1953]: 30).
Money IS and ONLY IS a universal medium of exchange. Any commodity that performs any other function is not a money, but a "good.""
ReplyDeleteAnd that is a view to be rejected: money can be an abstract unit of account with no medium of exchange role: in the Middle Ages Roman coin denominations continued to function as an abstract unit of account, even though they did not circulate (or rarely circulated) in physical form.
"Goods cannot be "accounted for" in a money commodity unless that money commodity was first traded on barter and shown to be valuable."
ReplyDeleteFalse.
First of all this unit of account was largely abstract: people weren't necessarily paying in silver shekels. It was a unit of account derived from a weight unit.
Their tax obligations were denominated in shekels, and they could pay in goods for which administered prices existed, to calculate their shekel value.
The belief that goods "cannot be 'accounted for' ... unless that money commodity was first traded on barter and shown to be valuable" is also a non sequitur.
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.
"That "unit of account" commodity must have already first been traded on (spot or credit) barter so that is known to have economic value as a unit of account."
ReplyDeleteYou also appear to be badly misinterpeting the Regression Theorem, as Robert Murphy states:
"in my understanding of the regression theorem, it’s not enough that some people at one point voluntarily exchanged things. That’s not a “link.” When Mises says that modern fiat currencies can be “traced” back to ancient commodities, he means there was a point at which the paper was legally redeemable for gold or silver. He doesn’t mean there was a point at which you could buy gold or silver with paper."
http://consultingbyrpm.com/blog/2011/09/have-anthropologists-overturned-menger.html#comment-23834
"Mises and other economists envisage barter spot transactons."
ReplyDeleteYes, spot barter transactions did take place. Mises wrote:
"Suppose that A and B exchange with each other a number of units of the commodities m and n. A acquires the commodity n because of the use-value that it has for him. He intends to consume it. The same is true of B, who acquires the commodity m for his immediate use. This is a case of direct exchange."
He was describing trading commodities m and n.
He wasn't describing trading commodity m for credit c. But I am sure if you had asked him whether or not people can trade commodities on credit, for other future commodities, he would have said of course that's possible. It's not illogical and does not contradict the regression theorem.
"And that is view to be rejected: money can be an abstract unit of account with no medium of exchange role: in the Middle Ages Roman coin denominations continued to function as an abstract unit of account, even though they did not circulate (or rarely circulated) in physical form."
Money is by definition a universal medium of exchange.
The stored coins in Rome were universally accepted in exchange. That the storage managers rarely used them in exchange, does not mean the coins were not universally accepted.
It's the same thing as me holding onto a $1 bill. I can hold onto it, and as long as it remains universally accepted, it's a money.
A given quantity of money commodity doesn't actually have to be traded at a given time, in order for it to be a money at that time.
In any event, nothing here falsifies the regression theorem of barter (spot and/or credit) preceding money.
"But I am sure if you had asked him whether or not people can trade commodities on credit, for other future commodities, he would have said of course that's possible."
ReplyDeleteOf course, he would: but that is not the issue.
The issue is the use of imaginary economies where barter spot transactions predominate and lead to the most saleable commodity becoming a medium of exchange.
If Mises and other economists had bothered to ask the question: what happens when spot barter trades AREN'T the predominate form of activity in the eocnomy, then their explanation of the origin of money would already have a serious problem.
(1) Many societies are capable of avoiding the immediate and significant double coincidence of wants problem by credit/debt or gift exchange economies.
(2) Historical evidence shows money can emerge by means other than barter spot trades.
The dogmatic statement by Menger and Mises that some people in states or state-like institutions (like temples) could not design money - that is, a unit of account which is then adopted by the cmmunity as a medium of exchange - is utterly false.
"Money is by definition a universal medium of exchange."
ReplyDeleteNo: money is:
(1) a unit of account,
(2) a medium of exchange, and
(c) a store of value.
It is possible that function (1) can precede function (2) and (3).
Austrian economics has a dogmatic and flawed definition of money.
In any event, nothing here falsifies the regression theorem of barter (spot and/or credit) preceding money.
ReplyDeleteThe Regression theorem is also flawed by the Mises's underlying assumption that money has no direct utility.
Since money has direct utility owing to the satifaction it provides in protecting against future uncertainty, the alleged circularity in proving how money has indirect value (which supposedly needs to be overcome) is an illusion.
I'm a Mises regression theorem proponent, so there's that. I find the above discussion very interesting. However, it seems to me that the value of the tablets or sticks and therefore their use (common use? were they actually used as a store of value or unit of exchange? It seems to me that they may have been trade-able like a Govt bond, but there's a divisibility problem with those tablets and sticks.. so its not a very good money - but I haven't read the underlying material) derives from the promise of the government or body issuing them to convert them to some underlying thing. Those sticks and tablets represent something else, not just more tablets.
ReplyDelete"Because the state agreed to accept the same 'worthless' items in payment of obligations to the state."
For me, this simply points to these items being accepted as exchangeable for some other good - at some point, the tablets and sticks change hands for some goods - back to the point when the tablets and sticks were first created. And at that point, which I think is the point Mises was trying to make with his simple example, there must have been something that could be reckoned as a unit of exchange, like bushels of wheat for the Pharaoh in the Biblical story of Joseph..
Like Lord Keynes is saying above, unit of account can precede the above - although it would have to somehow add to itself the transferability of ownership in order to be used as a store of value or unit of exchange. My private accounting is not proof of ownership. And again, there must be something countable and divisible and with all those money attributes at the bottom, which would again seem to come from trading of commodities again following that Misian regression thingy that seems to elicit such scorn..
Anyway, it didn't seem that anyone was addressing this in the above, so I thought I would bring it up. Enjoy!
The state is the monopolist supplier of money in most developed nations. The State also demands that our taxes are only payable in this very same money they are the monopolist issuer of.
ReplyDeleteTherefore, we demand money because it is the only means by which we can extinguish our tax obligations to the state.
Look at any country / peoples that have been conquered throughout history and more often than not the first thin the invaders will do is introduce taxes and of course make them payable only in the money they issue.
Mises Regression Theorem does not recognize that money is tax driven. It's ultimately a very poor explanation of why people use or except money.