The Social Life of Money

Nigel Dodd

• Publisher: Princeton University Press
• Year: 2016
• Print ISBN: 9780691169170, 9780691141428
• eBook ISBN: 9781400880867
• Topic: Social Sciences
• Subtopic: Economic Theory
• Index: Social Sciences

A reevaluation of what money is—and what it might be

Questions about the nature of money have gained a new urgency in the aftermath of the global financial crisis. Even as many people have less of it, there are more forms and systems of money, from local currencies and social lending to mobile money and Bitcoin. Yet our understanding of what money is—and what it might be—hasn't kept pace. In The Social Life of Money, Nigel Dodd, one of today's leading sociologists of money, reformulates the theory of the subject for a postcrisis world in which new kinds of money are proliferating.

What counts as legitimate action by central banks that issue currency and set policy? What underpins the right of nongovernmental actors to create new currencies? And how might new forms of money surpass or subvert government-sanctioned currencies? To answer such questions, The Social Life of Money takes a fresh and wide-ranging look at modern theories of money.

One of the book's central concerns is how money can be wrested from the domination and mismanagement of banks and governments and restored to its fundamental position as the "claim upon society" described by Georg Simmel. But rather than advancing yet another critique of the state-based monetary system, The Social Life of Money draws out the utopian aspects of money and the ways in which its transformation could in turn transform society, politics, and economics. The book also identifies the contributions of thinkers who have not previously been thought of as monetary theorists—including Nietzsche, Benjamin, Bataille, Deleuze and Guattari, Baudrillard, Derrida, and Hardt and Negri. The result provides new ways of thinking about money that seek not only to understand it but to change it.

1 ORIGINS

At the beginning, there was no money.

BANCO CENTRO DO BRASIL¹

Books on money, almost as a chorus, invariably begin with a discussion of its most simple, elementary forms, much as Durkheim began his investigation of religion. But whereas Durkheim suggested that “like any human institution, religion begins nowhere” (Durkheim 2001: 9), monetary scholars usually take the more bullish view that money must have started somewhere. They simply cannot agree on exactly where. Given the myriad forms that money has taken through history, and still takes today, one could be excused for thinking that there is no compelling reason to strive for a singular account of where it began. But many present-day debates about the future of money come down to differences of opinion about what money was originally, as if we can settle our arguments by regarding ancient history as lawyers treat precedent.² The problem with questions about where money started, of course, is that the answer usually depends on our assumptions about what money is, which, in turn, usually rest on arguments about where it began. Moreover, there is a crucial difference between the history of particular monetary forms, e.g., specie or coin, and the history of money in general (Grierson 1978: 6). We can be fairly confident about the identity of very early forms of specie, but it is open to debate whether these are also the most elementary forms of money. As we shall see, scholars who maintain that money is not essentially metallic but fiduciary argue that to locate its origins, we should be exploring early forms of debt and tribute payment. These are less tangible than coins, and some experts dispute that they are money at all. There is, in short, an almost unavoidable circularity involved whenever academics try getting to grips with the origins of money. Schumpeter once said that “no theory of money can be refuted by demonstration of the falsity of any assertions of its author concerning the primitive history of money, and no theory can be proven to be correct by a demonstration of the correctness of such assertions by its author” (Schumpeter 1991: 526–27). Nevertheless, ancestor stories are powerful as tools of monetary polemics, not just monetary theory. Like all such stories, their significance lies in being told, not necessarily in being true.

So are these accounts of origin just myths? Several scholars have richly explored the role played by myth and narrative in the operation of money and markets. As Jeffrey Alexander notes, all economic actors—institutions, markets, states, and individuals—“engage in performances that project meanings” (Alexander 2011: 3). Economic actors need narratives insofar as they bolster confidence, justify pessimism, and shape expectations before being “transmogrified into monetary calculus and loss and gain” (Alexander 2011: 4). Jens Beckert takes up a similar refrain, exploring how narratives, myths, and stories—alongside conventional finance theory—underpin actors’ expectations in financial markets. Indeed, it is inevitable that fiction should play an important role in economic situations because of their inherent uncertainty (Beckert 2013: 335). Beckert transports this analysis into the mechanism that works at the very core of the intersection between markets and money, namely, pricing. Although he does not agree with Durkheim’s observation that prices reflect what a society deems to be just,³ Beckert argues that “prices can only be understood with reference to social institutions, networks, and frameworks of meaning that structure the market field and individual decisions—and thereby influence prices” (Beckert 2011: 1). The formation of prices “from meaning” reflects the “cultural preconditions for the pricing of objects” (Beckert 2011: 16). For example, Viviana Zelizer’s work on the development of life and children’s insurance during the nineteenth century highlights how money’s location within the complex relationship between the sacred and the profane had to be reconfigured in order for life itself to be given monetary value (Zelizer 1978, 1981, 1985). In a similar vein, Olav Velthuis has shown how the pricing decisions of art gallery owners are made in conjunction with narrative practices that are “rich in symbolism [and] sharp moral judgments” (Velthuis 2005: 146). Arguing from the opposite direction but making what is essentially the same case, Zbaracki and Bergen have suggested that in some instances conventional price theory may itself “serve as a rational myth” used by actors to legitimize their decisions and to make sense of given situations: “Rational myths, like any myth, give meaning and order to a world,” he concludes (Zbaracki and Bergen 2008: 49).

Nothing I have to say in this chapter contradicts these insights, but my argument operates on a different level. Myths are important not just in relation to the modus operandi of money, markets, and prices but, more fundamentally, in relation to our very ideas of money: specifically, to echo Galbraith (1975), our ideas of “whence it came and where it went.” As I shall show, the academic literature is dominated by two major accounts of the origins of money. These accounts correspond to the two dominant mainstream theories of money in contemporary social science (i.e., the so-called Austrian and Keynesian viewpoints). The theories spotlight money’s ancient connections with, on one hand, barter exchange, and on the other, special forms of payment such as tribute and sacrifice. They are discussed in the first two sections of this chapter. But there are other accounts, too, which emphasize cultural and psychological aspects of money, specifying its links with calculation, gift exchange, language, and violence. These add richly to our repertoire of myths and stories about the origins of money, and I explore them in the remaining four sections of the chapter.

BARTER

The classic (and—despite its controversial nature—best) presentation of the barter theory of money’s origins is by Carl Menger, in his 1892 article, “On the Origin of Money.” His question is why anyone would accept a commodity (money) that they do not need. Menger finds it curious that people should be ready to exchange their goods for useless metal disks, or worse, for documents merely representing such disks. Such practices are, he remarks, “opposed to the ordinary course of things” (Menger 1892: 239). Rejecting the old Aristotelian argument that money can be decided by law or convention, Menger’s answer is that money emerges as a spontaneous solution to the problem of a double coincidence of wants in a barter exchange system. The theory continues to attract a sizable following, despite the weight of empirical evidence that has been used to refute it. Why?

Simply stated, the problem that Menger addresses is the difficulty of finding two parties where each wants what the other is offering in exchange. As long as this obstacle exists, trade is slowed down or prevented altogether. The most logical (and, indeed, natural) practical remedy, Menger suggests, lies in the same condition that gives rise to the problem, namely, that some commodities are more salable than others. Salability refers to the “facility” with which a commodity can be sold, at a reasonable price, and in a reasonable period of time (Menger 1892: 245).⁴ When a person is in possession of a commodity that is difficult to sell, the rational thing to do is to acquire a more salable commodity, even if one does not need it. In this way, although one does not acquire what one ultimately wants immediately, one “draws nearer to that object” (Menger 1892: 248). Without legal compulsion or regard to vague notions such as “convention” or the “common interest,” people have been led by their own self-interest to seek out the most salable goods, not because they need them directly but rather because these commodities can help them eventually to acquire what they do need. Certain commodities have emerged in particular places and times as objects of the demand for more salable commodities. These are the commodities that, through practice and habit, eventually become the most generally acceptable media of exchange: initially accepted by many, eventually by all. This, ultimately, is what we call money.⁵

Once a commodity is generally thought of as money, its salability inevitably rises until everyone has an interest in acquiring it. Money ensures its owner control over every commodity to be had on the market, and at prices that are appropriate to any given economic situation. As a consequence, the degree of differentiation between commodities that are more and less easy to sell (and, ultimately, between money and the rest) becomes increasingly more marked.⁶ Political authorities may have played an important role in standardizing monetary weights and measures according to the needs of commerce, as well as in ensuring that coinage can be trusted as to its content, but they have not determined what money is (Menger 1892: 255). Money’s origins are therefore to be found in the market, not the polity.⁷

Menger’s theory has been subjected to vehement criticism. According to Ingham, there is a logical fallacy at the heart of the evolutionary theory of money because it cannot explain why all agents choose a particular asset as “money.” The problem, he argues, comes down to Menger’s adherence to an untenable methodological individualism, with each agent trying to reduce transaction costs in isolation, both from each other and, more importantly, an overarching institutional authority: “To state the sociologically obvious: the advantages of money for the individual presuppose the existence of money as an institution in which its ‘moneyness’ is established” (Ingham 2004b: 23, original italics). Orléan sees the issue slightly differently, arguing that whereas the emphasis on reducing transactions costs is an advantage of Menger’s model, “what the instrumentalist approach has never been able successfully to demonstrate is that money is an essential requirement for the existence of a market economy” (Orléan 2013: 51).

Other critics, most notably historians and anthropologists, argue that the image of barter Menger describes is simply false. Caroline Humphrey describes the theory as a logical deduction from an imaginary state—a fantasy. No example of a pure and simple barter economy has ever been described by ethnographic evidence, she says, let alone the emergence of money from it (Humphrey 1985: 48). There are further doubts about what Menger has to say about the nature of barter itself. Einzig argues that Menger’s theory underplays barter’s adaptability, as well as the adaptability of communities to its supposed disadvantages. Barter may look inconvenient to modern eyes, but the double coincidence of wants problem is unlikely to have caused much difficulty in a small community where people already know a great deal about everybody else’s products and requirements (Einzig 1966: 343). Most of the difficulties that Menger and other economists come up with to explain money’s evolution are merely projections backward toward an imaginary age when no money existed (Einzig 1966: 341–42). Historically, barter usually took place between strangers and enemies: people rejected it because they preferred doing business with neighbors and friends, not because it was inefficient (Graeber 2011: 30). In its proper context, barter offered a number of distinct advantages relative to monetary exchange, such as the elaborate social and moral functions fulfilled by competitive gift exchange (Davies 1994: 9–10). In short, the argument that money emerged from barter relies on giving barter itself a bad name.

Nevertheless, Menger’s thesis lives on. Many university economics degrees still teach that money evolved, much as he described, as a means of getting around the inherent inefficiencies of barter exchange. Countless books on money—including some rather good ones (Coggan 2011)—also begin here, and the orthodoxy is often repeated by governments and public agencies.⁸ Menger’s account of the evolution of money continues to thrive not only in economics textbooks, however, but also in the arena of monetary policy. According to Goodhart, for example, the Eurozone project was shaped by assumptions about the nature of money that were consistent with (and arguably, derived from) Menger’s theory from the outset. By design, the euro entailed breaking up the relationship between money and political authority by assigning the task of monetary creation to a central bank that would be rigorously independent (Goodhart 1998: 425). This method is meant to treat money as if it were a commodity: a creature of the market, not of sovereignty, law, or society. According to Goodhart, the euro’s design was informed by the theory of “optimal currency areas,” in which it is assumed—consistent with Menger’s theory—that money’s spatial domain can evolve on the basis of the progressive minimization of transaction costs (Goodhart 1998: 419).

If Menger’s theory has been discredited by historical evidence that contradicts it, what explains its enduring appeal to economists? For one thing, the theory seems elegant and simple. As Goodhart notes, although the idea that money is a social or political artifact might be better supported by the empirical data, such a viewpoint “is somewhat woolly and socio-logical” (Goodhart 2008: 301), and does not lend itself easily to mathematical modeling. “So, economists have tended to ignore historical reality, to establish formal mathematical models of how private agents (with no government), transacting among themselves, might jointly adopt an equilibrium in which they all settle on a common monetary instrument” (Goodhart 2008: 301). The notion that money evolved as Menger described seems quite intuitive for noneconomists, too. It appears to capture all that is essential about money: its historic connections with trade and exchange, its apparent efficiency, as well as important features of objects that were initially used as money (like cowrie shells and precious metal), such as the ability to be counted and carried. The theory seems disarmingly modest in its claims. Nobody invented money; its origins are not mysterious, merely the outcome of practical common sense as societies and their trading systems have evolved. Students and readers of books about money may find it easy to sympathize with this account. Most of us have experienced a situation like the one described by economists as the problem of the double coincidence of wants: when we were children, for example, and wanted to swap unwanted toys. Few people disagree with the idea that a life without money, if it meant that we had to engage in barter, would be too complicated, even in the Internet age when information should be easier to come by.

Menger’s theory is especially popular among libertarians, who believe that money is best organized by markets, not states. The argument that money began as an easily traded commodity offers persuasive support for the view that currencies should be linked to the value of a precious metal such as gold, which is naturally scarce. Menger’s image of money often underwrites the arguments of those who promote “austerity” as the best available means of achieving economic recovery because—supposedly—it reduces the very dependence on debt that threatens to erode money’s value. Advocates of the electronic currency, Bitcoin, also invoke Menger to promote the idea that through special software and advanced encryption, a virtual commodity can be created and used as a money that is even scarcer than gold (see Chapter 8). Bitcoin is immensely popular—its value often soars in relation to major currencies such as the U.S. dollar—but its price crashes frequently. Though the crashes do not refute Menger’s theory per se, the rapidly rising prices may well do so. It was the finite supply of Bitcoins that rendered them especially attractive as a store of value, and therefore as an instrument of speculation. Left to markets, as Menger’s theory suggests they ought to be, Bitcoins have not—or at least not yet—been an unmitigated success as money.

Exactly the same could be said of gold, arguably the ultimate salable commodity. Gold was worth less than $30 an ounce until the 1930s and less than $40 until 1970. Gold’s price broke the $1,000 an ounce barrier in 2009, reaching a little more than $1,700 by early 2012. To sympathizers of Menger, this rise provides all the evidence necessary for the declining purchasing ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication Page
• Contents
• Preface to the Paperback Edition
• Acknowledgements
• Introduction
• 1 Origins
• 2 Capital
• 3 Debt
• 4 Guilt
• 5 Waste
• 6 Territory
• 7 Culture
• 8 Utopia
• Conclusion
• Bibliography
• Index