Blogs > Liberty and Power > Twenty Questions On Mises, Part II: Spooky Action at a Distance

Nov 27, 2006 8:15 pm

Twenty Questions On Mises, Part II: Spooky Action at a Distance

More on Mises, particularly concerning the definition of money, with a detour by way of Aristotle.

It is downright embarrassing to read the ancients when they speak of money and credit. Aristotle wrote,

There are two sorts of wealth-getting, as I have said; one is a part of household management, the other is retail trade: the former necessary and honorable, while that which consists in exchange is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of an modes of getting wealth this is the most unnatural [Politics, Book I, part x].

A modern, well-educated reader will note that the philosopher had no concepts of distributed risk or opportunity cost with which to evaluate the practice of charging interest on money. Without these concepts, his explanation of interest relied on likening it to phenomena that the ancients found uncanny: birth and breeding; the resemblance of parent and child; the distinction between the"natural" or"intended" versus the unnatural or opportunistic. Aristotle was whistling in the dark here, and the sheer fuzziness of his explanation should have been a tip-off.

Ludwig von Mises offered a far more sensible account of money. He defined money as follows:

[M]oney is a commodity whose economic function is to facilitate the interchange of goods and services [Mises, Ludwig von, The Theory of Money and Credit, part I, chapter 1.]

Mises strenuously resisted any addenda to this definition, showing how each of several extensions -- money is the facilitator of credit; money is the transmitter of value through time and space; money is the general medium of payment -- may all be shown, whatever their complications, to be encompassed in the above definition. All of this strikes me as generally correct, as does the almost trivial extension that interest is that which we pay for use of another person's money, just as we might pay him for use of a rented room or suit of clothing. There is nothing uncanny at all to it.

What puzzles me, however, are certain implications of the word" commodity" in the context of money.

Some definitions of the word make"money" and" commodity" into a vicious circle, as this one does:

Commodity: A good or a service that is exchanged for money.


Other definitions are superficially instructive, but they leave me some deep dilemmas. Here's The Economist's definition of" commodity" from its online economics glossary:

A comparatively homogeneous product that can typically be bought in bulk. It usually refers to a raw material – oil, cotton, cocoa, silver – but can also describe a manufactured product used to make other things, for example, microchips used in personal computers. Commodities are often traded on commodity exchanges.

Very well: A quantity of cotton can make a shirt of a certain type; a quantity of money can facilitate a given exchange. Both cotton and money can be bought in bulk; both are relatively homogenous; both are traded on exchanges. Still, this word commodity gets me very quickly into Aristotle-land. It seems clear to me that while money may take the form of a commodity, a money is very far from being an ordinary commodity.

Pardon me, now, while I start sounding a lot like the philosopher on a bad day. I assure you it's to my own consternation as well.

Consider the seller in a market: It is presumed at the outset of a transaction that the seller does not have the money that will go into the transaction. The commodity"money" is a part of the transaction, not a thing that facilitates the transaction itself -- not any more, at least, than the shirt for which the money is traded. If"money" is a thing exchanged, rather than a thing that facilitates exchanges, Mises' definition seems in a sense to exclude what it attempts to define.

Moreover, consider the shelves displaying a seller's goods, the price tags, the advertisements, and the store itself. These are commodities whose economic function is to facilitate the interchange of goods and services. Are they a kind money? Obviously not. Mises' definition may therefore be overbroad as well.

Further, consider the buyer: It is obvious that a commodity may be consumed or otherwise transformed to satisfy an economic want, as one takes an aspirin to relieve a headache. Yet how can a commodity, in being passed, unchanged, from one entity to another, with the intent that it will likewise be exchanged and exchanged again, be said also to satisfy an economic want, all by itself? With each exchange, it seems only to do half the job, because money, properly speaking, satisfies no one's wants. It is only what one can do with money that makes it so satisfying -- namely, obtain other things to satisfy our wants.

It seems a better definition, if I may, to say that money is a tool that facilitates interchanges involving three or more market actors, who might otherwise be completely independent of one another.

If I have a quantity of wheat, and you have a quantity of barley, and we determine to exchange them at a set ratio, then money is quite unnecessary. If I have wheat, and you have barley, and we cannot agree on a ratio of exchange using the goods themselves, then money will not help us at all. Assuming no change in our evaluations, at best adding money will only restate our difficulties in other terms.

Money becomes useful only in situations of the following type: Suppose you desire my wheat, but you have only cabbage to offer. Meanwhile, I don't want any cabbage at all, or I want it in insufficient quantity to barter for all of the wheat I wish to sell. You go instead to the person who wants cabbage in great quantities; you make a sale. If afterward my wheat is not too expensive, then a further sale occurs; afterward, using the money, I buy barley. This seems to explain what money does far better than claiming that money simply facilitates interchange. After all, in the most basic form of interchange, money can offer no help whatsoever, and it is only when three or actors are present that money becomes useful.

In a real economy, the use value of money should be expected to grow with the addition of each subsequent actor, since each person has a different hierarchy of needs, different marginal utilities for various products, and different resources they can bring to bear. Money makes coordination of these actions possible.

Things get stranger still. When instruments of payment -- checks, credit card receipts, banknotes -- are employed instead of genuine money, then no parties to a transaction need to have any money at all. All of the money involved can sit placidly in a vault somewhere... even while it does its work in the market. Einstein famously called some aspects of quantum mechanics"spooky action at a distance," which starts to sound fairly apt by now.

Yes, the gold that participates in a gold standard is a commodity. But it seems clear, in these days of sadly commodity-free money, that at least one part of what money"is" is a set of institutionalized practices, which may be followed whether or not a commodity follows likewise. (This makes fiat money problematic from a definitional standpoint, and I agree with Mises that it should be. If you want really spooky action at a distance, consider the credit card receipt, drawn on a credit card, drawn on credit for fiat money that is drawn on the knowledge that someone, somewhere might be able to use that fiat money… to pay the obligations they owe to the U.S. government, which accepts nothing else. Aristotle would have kittens if he knew what we were up to nowadays.)

In any case, I will state my question in a succinct form: Either money facilitates an exchange, or it is a commodity that takes part in the exchange. But it is hard to see the exchanged thing as a facilitator, except across multiple exchanges. And it is hard to see money as a commodity at all when non-commodity proxies are used to facilitate exchanges, instead of the commodities themselves. Is there a peculiar definition of either"exchange"/"interchange" or" commodity" that would settle my difficulties? If not, what am I missing?

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More Comments:

Sudha Shenoy - 11/28/2006

1. Menger has a magnificent passage in his Principles explaining _how_ a particular commodity (=good) gradually acquires an _additional_ use -- a 'monetary' function. The argument is a bit too long to reproduce here, it's best read in the original.

2. TM&C was first published in 1912 -- i.e., during the hey-day of the proper gold standard, when gold coins circulated freely. 'Money' then meant a real good.

3. See what Mises has to say on 'money-substitutes' & 'credit instruments': they are accepted because people are certain they can be exchanged for 'standard money' on demand. See what happens to a bankrupt's cheques for example.

4. Aristotle's 'economic' world was extremely simple, in comparison with ours. So he had equally naive views about trade etc. A goodish part of production then _did_ take part _within_ the household. Wider exchange was not that significant & hence these wider relations were regarded with some suspicion. See Hesiod, for example.

5. The narrower use of the term 'commodity' to mean 'primary products' dates from the mid-19th century or so -- when industrial production really took off. Before then, agricultural & handicraft outputs predominated.