Transcript Philosophy of Money Georg Simmel (1907)

Philosophy of Money
Georg Simmel (1907)
Monetary Theory and Policy
Graduate Seminar ECON 6411
Fall 2008
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Basis
• A philosophy of money or a sociology of money.
• Austrian, draws heavily on Carl Menger (1871).
• Rejects Karl Marx’s labor theory of value in favor
of an Austrian variant of the marginal utility
approach.
• Assumes rational, purposeful, essentially utilitymaximizing agents. Individualistic approach.
• Highly pragmatic and positivistic. (Anticipates
Friedman)
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Focus
• We tend to focus on money in terms of its functions:
– in exchange (medium of exchange),
– as an asset (store of value), and
– being useful for accounting purposes (unit of account).
• Simmel focuses on money and the monetary system
as an integral part of the market economy.
– Money is a social institution.
– Money is related to justice, liberty, and man as a social
creature.
– The monetary system is not the conscious creation of a
political entity, but rather is the unintended product of
social evolution.
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Money and Society
• Simmel begins with exchange, and the relationship that
exchange creates between people. Exchange is a contract.
• The institution of money is time-varying, evolving through
time as a result of social forces, not as a result of design.
• Money is similar to moral or moretical codes, or even
common law.
• The intrinsic value of money is incidental to its nature or
usefulness.
• The critical feature giving money value is its acceptability
as payment for useful commodities at a stable rate of
exchange. Each member to exchange must believe this
feature is guaranteed somehow.
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The Guarantee
• Belief in that guarantee contains “an element of
socio-psychological quasi-religious faith” based
upon “confidence in the socio-political
organization and order.”
• Simmel refers to this as trust.
• Immediate implication: if anything damages the
credibility of the contract between the guarantor
and the parties to exchange, the economic system
breaks down.
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Money and Freedom
• Money is also linked directly to justice and freedom.
• “Exchange is … a really wonderful means for combining
justice with changes in ownership.”
• Money is a social institution and is meaningless if
restricted to the individual.
• Money expands liberty.
• Simmel does not argue that economic freedom is sufficient
to guarantee political freedom. Like Friedman, he argues
that it is a necessary, but not sufficient condition.
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Threats to a
Monetary Market Economy
• Valuation is a social problem and operates through
money. Distortions affect valuation, hence justice.
• Wages paid in money expose the worker to
“uncertainty and irregularity” stemming from
fluctuations in the purchasing power of money.
• Simmel fears inflation and inflation volatility.
• Socialism may be a natural point of evolution of
the social organization.
• Rejects Hume’s notion of long-run neutrality
because of widely-recognized short-run neutrality.
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Threats (2)
• Walrasian general equilibrium models treat money
as if it were a private durable good. This is
misleading.
• This leads researchers like Lucas to argue that
even if agents make mistakes about relative prices
when price level fluctuations are unanticipated,
markets continue to function and clear.
• Inflation undermines mutual trust, resulting in a
decline in mutually beneficial exchanges, leading
to involuntary unemployment.
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Threats (3)
• This anticipates the Monetarist position that
putting control of the money supply in the hands
of the government is to invite the destruction of
the social order.
– Tie the money supply to an anchor?
• Anticipates Keynes, who points out that a
monetary economy is fundamentally different
from a barter economy.
• Unlike Keynes, Simmel sees discretionary policy
as destructive. Like Keynes, he sees the monetary
economy as fragile.
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