|Montreal, May 15, 2004 / No 142
by Edward W.Younkins
Carl Menger’s emphasis on methodological individualism and the compositive method led him to the significance of the unintended consequences of human action. He recognized that the relevant unit of inquiry is acting and purposive man and searched for general patterns of social development that arose as a consequence of human action in a world of scarcity. Menger grounded his analysis on the experience of the valuing individual and concentrated on explaining the process through which individual valuation set in motion the competitive discovery process of the market. He explained how market phenomena emerge as unintended consequences of subjective valuation processes and demonstrated how institutions which serve everyone can come into existence without a common will overseeing their establishment. Menger searched for compositive interpretations for the existence of social and economic institutions rather than accounts which focus on how specific institutions have been intentionally designed for special purposes.
For Menger, the individual is the unit of analysis because it is only at the individual level that meaning can be assigned to actions. His methodological individualism is not atomistic. On the contrary, it treats individuals not as independent and isolated but instead as members of various types of complex relational systems. For Menger, it is the impact of actions of individual persons that determines the course of human events. Institutions emerge as the unintended consequences of choices by individuals pursuing their personal interests. Economic phenomena are the results of interactions of the thoughts and actions of countless individuals. Menger was a pioneer in providing theoretical support for the evolutionist concept of social processes.
Causal-genetic analysis is part of the Mengerian heritage. His search for causal-genetic explanations ruled out the use of mathematical techniques because Menger sought causal explanations whereas mathematical economics is limited to providing functional relationships. Menger’s concern with the nature of economic phenomena prompted him to pay attention to the reasons and origins for their existence. His essentialism led him to repudiate mathematical models and the interdependent determination of economic variables. Through causal-genetic analysis Menger sought to discover relationships of cause and effect and to explain the emergence, change, and development of organic institutions over time.
Money as an emerged social institution
Menger’s theory on money forcefully illustrates the essential role he assigns to the principle of methodological individualism. His theory begins with the idea that valuation arises from subjective perceptions of individuals and ends with money as an emerged social institution. Menger’s theory of the origin of money is an evolutionary explanation of a spontaneous process in which direct exchange via barter transforms into indirect trade with an institutionally established medium of exchange. He illustrates how the money universal is an institutional form that is a product of a spontaneous social process relying on the entrepreneurial and economizing actions of individuals. Human action begins a discovery process that results in the creation of the institution of money that none of the actors intended. The composite outcome of individuals’ economizing activities is shown by Menger to be the establishment of a generally accepted medium of exchange despite the fact that no one intended to create money by engaging in indirect exchange.
Menger’s causal history of money starts with the state of barter economy which permits exchange but with great difficulty. A barter economy is a natural system of exchange in contrast to a monetary system. People who want to trade first try barter but the difficulty or impossibility of finding the requisite double coincidence of wants between individuals poses a huge problem. In the course of time, some individuals realize that they will be more able to make trades if they accumulate goods that other people want. These agents who acquire goods that have greater subjective value to many other people will make a greater number of exchanges and make them more easily and thereby make themselves wealthier. In the beginning only a small number of actors recognize the advantage of indirect exchange, the process of exchanging their goods for more marketable commodities. Other people will adopt the same behavior as they observe and imitate the successful behavior of these first individuals. They too will begin to attempt to use those same goods as a medium of exchange. Less saleable goods are surrendered for those of greater saleability. The most saleable of all goods eventually becomes money. It follows that money will appear progressively via a spontaneous learning process that is a product of individual interactions of people following their self-interest and their personal plans of action.
Menger explains that people will trade to obtain the goods they want to consume and that they prefer to make the requisite trades as easily as possible. It follows that people will progressively learn to choose more and more marketable commodities to advance to indirect exchange. As the number of desired media commodities dwindles, the demand for each of the remaining ones increases, making each of them more desirable as a medium of exchange. This narrowing process continues until the number of commodities used as a medium of exchange is reduced to one (or perhaps two) goods that are subjectively highly desired and that can fulfill the minimal physical requirements of money. Menger explains that gold was selected as a generally accepted medium of exchange because of its physical real essence and not by mere chance. The real essence of gold, based on its various properties, is at least partly responsible for its choice as a medium of exchange.
The economic interests of individuals combined with their increasing knowledge leads them to exchange their goods for more marketable ones without any prior agreement, legislation, or consideration of the common good. Money emerges from an invisible hand process. It is the result of human action but not of human design. The institution of money is an unintended consequence of human action. Money results from an on-going learning process.
Money as a measure of price rather than value
Menger was an essentialist who discussed the real essence of money. He explains that money is a measure of price rather than a measure of value and that it is the only commodity in which all the other commodities can be evaluated without using roundabout procedures. He illustrates how money, as an economic universal, is embodied in the many money particulars. Specific exemplifications of money have the capabilities, tendencies, and powers they do by virtue of money’s real essence. The specifics of a particular manifestation of money is the result of human design, whereas the universal of that and all other appearances of money is due to a spontaneous social process in which economizing individuals notice that some goods are marketable than others. Menger emphasizes the subjectivity and knowledge of the individual regarding his needs and wants and the ability of objects to satisfy them.
Menger studies the essence (or nature) of economic phenomena such as money. He explains that any particular instantiation of money is contaminated because it is not merely a manifestation of characteristics and tendencies that inhere in the money universal, but includes other specific factors of time and place as well. These other factors are omitted in the process of abstraction and isolation in which the idea of money as an economic universal was constructed.
Menger’s account of the origin and evolution of money is a prime example of his conception of the spontaneous emergence of organic institutions or complex economic phenomena. Institutions thus result from a decentralized trial and error process in which the behaviors that best systemize and harmonize actions of individuals within society have a tendency to predominate. Institutions emerge from a social process resulting from numerous human actions and initiated by creative and successful individuals who, in their peculiar historical circumstances of time and place, are able to discover before others that they can achieve their goals more easily if they follow certain behaviors. Through an unconscious social learning process, other members of society imitate the actions of these innovators. As a result, institutions, or guided behaviors, which enhance life in a social setting, emerge.
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