What is a Theory of Money? By Graham Hubbs

As is true of any other social kind, money can be studied in a variety of ways, for a variety of reasons, towards one or several of a variety of ends. A businessperson who wants to know how to make money might study the way it is produced in markets to enrich themselves. They might not think much about what, at its core, money is, even though it rules everything around them. Many academic economists, similarly ruled by money, likewise take next to no interest in its ontology even though they talk constantly about it. Other researchers probe this ontology indirectly without making it their primary focus. An anthropologist might investigate the media and practices that constitute money use in a specific community; an historian might study how the invention of coinage in Asia Minor around 600 BCE affected war and commerce in Ancient Greece. The questions that guide the anthropologist and the historian and the methods they use to answer their questions help answer the basic ontological question, “What is money?”, even though they may not address the question headon.

But suppose we want to tackle the matter directly and try to say, in something like a definition, what money is. What kind of account will give us what we want? In this post, I’ll discuss one of the most prominent answers to the basic ontological question, focusing not just on the particularities of the answer itself but also, more broadly, on the kind of account the answer exemplifies. By thinking about the sort of explanation the answer gives to the basic ontological question, we discover some of the explanatory puzzles that have historically motivated theorists of money. When we think about what has puzzled these theorists, we can start to see some of their basic assumptions and blindspots, and not just about money, but about human nature and communities more generally. And when we think about how it can be helpful to us, today, to reveal those assumptions and blindspots, we can appreciate the contributions that philosophy, and especially historically-informed philosophy, has to make to political and economic theory and practice. This post will serve as the first step towards arguing for these methodological and programmatic claims.

The answer to the question, “What is money?” that I want to discuss here is common to explanatory approaches that include “metalism,” the “catallactic” theory of money, and the “commodity” theory of money. There are important differences between these, but what they all have in common is the idea that money is, at base, a medium of exchange, a commercial tool whose purpose is to ameliorate the inconveniences of barter. Aristotle suggests a view along these lines in Book I, Chapter 8 of Nichomachean Ethics; John Locke has this in mind when he discusses money in the chapter of The Second Treatise of Government devoted to property; Adam Smith starts The Wealth of Nations by giving a medium-of-exchange account of money; Karl Marx does the same at the beginning of Capital; ditto Carl Menger in The Origins of Money. In all of these works, we humans are depicted as bartering creatures who improve our lot by swapping goods out of individual self-interest. On a good day, for example, I might have some extra clothes and want some whiskey, and you might have some extra whiskey and want some clothes, and we might settle on an amount of your extra whiskey to trade for my extra clothes, and so we might swap the one for the other. Everyone wins. There will be plenty of days, however, when no one wins, days when one of us doesn’t have anything the other one wants, in which case trade won’t happen. If only there were some thing that each of us always wanted, we would never find ourselves in this bind. Money comes into being to solve this problem. Everybody always wants it, because it can be used to buy anything on the market, and it can be used to buy anything on the market because everyone always wants it. It thus exists to make bartering easier, and anything else we can do with money derives from its function as a generally-accepted medium of exchange.

If we set aside the content of this account and think instead about its explanatory form, we notice that it is a genetic account. It explains what money is by telling us how it came to be. There are other sorts of explanation we could give of the ontology of money: for example, we could give a functionalist account that lists the basic uses of money. To be sure, all of the theorists above have things to say about the functions of money, but these functions are not taken to be mysterious in the same way that very existence of a generally-accepted medium of exchange is. If the purpose of an artifact appears obvious enough, we may not exert much theoretical energy analyzing its functions—the interesting explanations will seem to lie elsewhere. So, if it is just obvious that money is what it is because it is generally accepted in exchange for commodities, it won’t be very interesting to say that money functions as a medium of exchange, but it may still be interesting to explain how money comes to have this power in the first place. On classic versions of the medium of exchange theory, money has this power because the stuff it is made of is either itself a commodity (e.g., gold) or represents a commodity (e.g., paper money that is exchangeable for gold), so it trades in a marketplace like any other commodity. Some time long ago, the story goes, there was no money, and the stuff that would eventually become the first money was just a commodity like any other commodity. Over time, however, this stuff became a very special commodity, because everyone wanted it. At that point, it could be used in most any exchange; at that point, it became useful not just for trading for stuff but also for establishing the prices of stuff; at that point, this very special commodity became money. So it was, the story concludes, that money came to be.

Now when we talk about how “money came to be,” there are at least two different things we might have in mind. We might be saying, of some class of object, that it came to be money through a particular social process. In a 1945 paper, R. A. Radford gives a famous example of this by describing the way that cigarettes functioned as a generally-accepted medium of exchange in a World War II prison camp. This account of how cigarettes became money, however, does not tell us how the very practice of using something as a generally-accepted medium of exchange came into being. The prisoners were all already familiar with the practice. If we want to give a genetic account of the ontology of money, we don’t want an account such as Radford’s; we want an account of how a community that lacks the social practice of using money comes to have that practice. This is what the theorists above all aim to supply: a story of how and why communities that lacked money-practices came to have them.

The consensus of those who study the ancient history of money, tracing money-practices all the way back to Mesopotamia, is that this story is a myth. The work of Michael Hudson and Geoffrey Ingham and David Graeber suggests that this story is, in fact, backwards—according to them, money came first, and then, harnessing the power of money to function as a unit of account, commodity prices and markets evolved. I will have much more to say about this alternative to the orthodox, medium of exchange view in future posts. Right now, I want to close with a question that a philosopher might have upon hearing that the orthodox view is a myth: so what? Our explanatory goal was to illuminate the ontology of money, but for some reason we tried to do this by giving a genetic account of a social practice. But why think that a history like this would ever be relevant to the basic ontological question we wanted to answer? Compare chess: if I want to understand its ontology, what I need to learn are the rules that constitute the game. The history of chess might be curious and intriguing, but it is separable from the game itself, and if I want to understand the game itself, I should study its constitutive rules, not its history. When our interests are ontological, why would history ever matter? This is another matter I will address in future posts.