Requirements of Philosophy of Money and Finance

Geoffrey Ingham is a distinguished economic sociologist and political economist who has contributed greatly to the development of a (sorely-needed) genuine ‘monetary science’ (Mendoza 2012) as opposed to the limited scope of ‘monetary economics’ as this is usually defined. A notable feature of his work has been his ‘longstanding impatience with the disciplinary boundaries of the social sciences in academia’ (Ingham 2004) and a concerted effort to break them down. In previous work (Smithin 2009, 2011), I have similarly argued that a full understanding of monetary and financial issues (and therefore of ‘economic issues’ in general)² will require far more of an interdisciplinary approach than is currently the norm in academia. This chapter, therefore, accepts Ingham’s position essentially without reservation.

In what follows, the first section of the chapter identifies each of the academic disciplines (if that is the right word) that seem to be relevant, and how they relate to the traditional branches of philosophy itself. This is the origin of the idea of the ‘requirements’ for a philosophy of money and finance. Later sections then address, in turn, a number of the obvious questions arising from the overall scheme and make some attempt to answer them. Particular attention is paid to Geoff Ingham’s home discipline of economic sociology, and to the philosophical gulf that exists between that field of study and the mainstream/neoclassical notion of microeconomics or micro-foundations.

According to Smithin (2009, 2011), a realist approach to monetary and financial issues able to effectively cross interdisciplinary boundaries would require study in each of the following fields (in order):

The term realism is used in the sense of, for example, Searle (1995, 2010) or Mendoza (2012), and the term ontology as in the work of Lawson (1997, 2003) or Kim (2011). The argument is that there needs to be developed a realist ontology of the underlying social institutions relevant/necessary to the conduct of economic activity. It must include all such things as business firms, money, banks, governments, and so on. In short, there has to be an investigation of the basic nature of social institutions and social facts (Searle 2010). Geoffrey Ingham’s most important book is entitled The Nature of Money (2004). It is particularly important to stress the large difference in kind between the ‘social facts’, and the facts of the physical or biological world, the so-called ‘brute facts’ studied in natural science. Searle (1995), for example, wrote extensively about this in his Construction of Social Reality. I think that it is vitally important to note that the title of Searle’s book was not the Social Construction of Reality.

Next, the idea of economic sociology implies a study of the specific social institutions in a given socioeconomic system. The research problem of the pioneering economic sociologist Max Weber (2003/1927), for example, in the General Economic History was to decipher the ‘meaning and presuppositions of modern capitalism’, also known as the ‘method of enterprise’ (Collins 1986). Meanwhile, Schumpeter (1983/1934) wrote about The Theory of Economic Development set explicitly in the context of the institution of ‘capitalist credit-money’ (Ingham 2004). Geoffrey Ingham himself recently published a book, entitled simply Capitalism (2008), dealing with the twenty-first-century version of the phenomenon.

Monetary macroeconomics is (I would say) by far the most important ‘technical’ field of economics. It has, of course, not coincidentally, been the main area of interest for a great many heterodox economists, including such groups as Post-Keynesians, circuit theorists, and contemporary adherents of MMT (modern money theory). The main thing to notice about this general area of research is the overwhelming emphasis on the qualifier monetary. Macroeconomics is monetary economics, nothing more, nothing less. The titles of Keynes’s most important books, A Tract on Monetary Reform (1923), A Treatise on Money (1971/1930), and The General Theory of Employment Interest and Money (1964/1936) most certainly seem to have been intended to imply as much. The focus on money is also the essential reason why the social institutions of money itself, credit, banks, and so on, need to be thought about in depth before the topic of macroeconomics can even get started. Geoff Ingham has written persuasively on this subject in an article ‘Some Recent Changes in the Relationship between Sociology and Economics’, published in the Cambridge Journal of Economics in 1996.

Political economy, finally, deals with questions of policy and governance, comparative economic systems, notions of equity, and income and wealth distribution. Ingham’s (1984) book on Capitalism Divided was an important and well-regarded contribution to this field.

The requirements set out in the list (1) through (4) seem to correspond (with some overlap) to the different branches of philosophy as such. We could therefore set out a second list, again in order, as follows:

In the double scheme, categories (2) and (3) from the list of disciplines relate to category (II) from the philosophical list. The argument, therefore, is that economic sociology and monetary macroeconomics together comprise the relevant epistemology as opposed, particularly, to neoclassical microeconomics. Similarly, the subject of political economy in category (4) corresponds to ethics and politics in categories (III) and (IV). This is the point at which the ethical and political dimensions become relevant. A graphical representation of the correspondence between our two lists appears in Figure 1.1.

In the next section of the chapter it will be necessary to highlight a few of the basic questions that might be asked about the overall scheme and its interconnections. Some of these will already have naturally suggested themselves in the mind of the reader.

Figure 1.1 irresistibly recalls a quote from Simmel’s Philosophy of Money (1978/1907), which runs as follows:

Every area of research has two boundaries at which the process of reflection ceases to be exact and takes on a philosophical character … If the start of the philosophical domain marks, as it were, the lower boundary of the exact domain, then its upper boundary is where the ever fragmentary contents of positive knowledge seek to be augmented by definitive concepts into a world picture and be related to the totality of life.

However, it will soon be realized that the scheme of Figure 1 really has no such boundaries. There is a ‘philosophical character’ throughout. The implication is that although there certainly can be precision of a distinct kind in solving the various research problems, there cannot be the sort of ‘exactness’ that is (presumably or allegedly) found in the natural sciences. Once again, the subject matter is different.

This leads on to the question of the type of knowledge that is sought. There is a Greek word episteme (from the same root as epistemology) which is often translated as ‘scientific knowledge’. Is this the sort of knowledge that we seek? Unfortunately, a problem already hinted at in the previous paragraph, the use of the modern term science in the financial or monetary context is likely to be misleading, for the primarily cultural reasons identified by Lawson (2003). It would be better to say something like an understanding of the ‘principles of things’. Another type of knowledge might be labeled technical knowledge. In the present context, this would have to be thought of as the type of material learned in ‘functional courses’ in business school, such as accounting, finance, marketing, and so on. In these courses the student learns about such things as the rules to be applied to double-entry book-keeping and balance sheets, and technical details about how the various financial instruments (for example, stocks and bonds) and their derivatives (for example, options and futures), are supposed to work. I would say that a third type of knowledge, the notion of practical knowledge (also much praised, at least in lip-service, in business schools and similar arenas), is, in contrast, something quite different. The term suggests ‘hands-on’ experience which, by definition, cannot be found in a college course. It is a clear case of ‘Do it Yourself’. In the financial world, the sort of thing I have in mind in this case is something as simple as, for example, being physically able to turn on a computer and to actually buy and sell stocks or bonds.

I think it is clear that we must here be mainly interested in the first type of knowledge. As I have tried to impress on several generations of my students enrolled in business administration courses (perhaps without notable success for a great many individuals in that group, but not all), is that in the university setting we must surely be interested in the financial equivalent of episteme. There is not much use in ‘playing the market’, for example, or knowing how some complicated financial derivative works, or even in earning an academic PhD in Finance, without some idea of the basic principles of credit and money. One question that I invariably ask at PhD oral examinations in fields like banking, finance, and accounting (and in economics) is: do ‘loans make deposits’ or do ‘deposits make loans’? I leave it to the reader to guess the most frequent answer to this question, very often made after perhaps seven or eight years of intense study of the topic on the part of the person answering it.

It is crucially important to note where ‘ethics’ and ‘politics’ fit in as part of the overall logical scheme. Actually, it is not possible to discuss either of these until after the ontological and epistemological issues have been decided. There may well exist an ‘objective science of ethics’, which was the desiderata of libertarian scholars such as Rothbard (1998), for example. The argument is not relativism or pragmatism. However, nor does it lead to the a priori system of ethics that Rothbard and others have argued for. Rather the implication is that the ethical scheme must be coherent in some sense. It must be consistent with the ‘way the world works’. Smithin (2011) has argued that Weber was therefore correct in his insistence to a left-wing group of students that social science in the first instance should be Wertfrei (value free).³ The reason for this is that, according to the sequence set out here, the ethical and political questions cannot reasonably be dealt with until after the ontological and epistemological issues have been decided. The ethical and political attitudes adopted must ultimately be compatible with the underlying nature (ontology) of the social reality (Smithin 2009).

What will certainly strike most economists, whether from the academic mainstream, or for that matter from many heterodox schools of thought, is the absence so far of any reference to the discipline of ‘microeconomics’ in the discussion. Why does this not appear explicitly? The answer is that it does not really need to be there. Once it is recognized that the term economic sociology already includes such things as value theory, pricing theory, the theory of the firm, and the study of market behaviour, the omission becomes entirely reasonable. This way of expressing it, however, puts the whole notion of ‘market forces’ in its place (so to speak) in the broader social order rather than being the only thing discussed. Moreover, the ordering of the list (1), (2), (3), (4), makes it crystal-clear that ‘the market’ certainly cannot logically ever be the first thing discussed. Neither the concept of the market, nor the academic discipline of neoclassical microeconomics as it has developed over the years, is foundational in the sense definitely implied by the coinage of the term ‘micro-foundations’.

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