1 Philosophy of Money Georg Simmel (1907) Monetary Theory and Policy Graduate Seminar ECON 6411 Fall 2008

2 Basis A philosophy of money or a sociology of money.A philosophy of money or a sociology of money. Austrian, draws heavily on Carl Menger (1871).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.Rejects Karl Marx’s labor theory of value in favor of an Austrian variant of the marginal utility approach. Assumes rational, purposeful, essentially utility- maximizing agents. Individualistic approach.Assumes rational, purposeful, essentially utility- maximizing agents. Individualistic approach. Highly pragmatic and positivistic. (Anticipates Friedman)Highly pragmatic and positivistic. (Anticipates Friedman)

3 Focus We tend to focus on money in terms of its functions: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.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.

4 Money and Society Simmel begins with exchange, and the relationship that exchange creates between people. Exchange is a contract.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.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.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 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.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.

5 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.”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.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.Immediate implication: if anything damages the credibility of the contract between the guarantor and the parties to exchange, the economic system breaks down.

6 Money and Freedom Money is also linked directly to justice and freedom.Money is also linked directly to justice and freedom. “Exchange is … a really wonderful means for combining justice with changes in ownership.”“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 is a social institution and is meaningless if restricted to the individual. Money expands liberty.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.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.

7 Threats to a Monetary Market Economy Valuation is a social problem and operates through money. Distortions affect valuation, hence justice.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.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.Simmel fears inflation and inflation volatility. Socialism may be a natural point of evolution of the social organization.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.Rejects Hume’s notion of long-run neutrality because of widely-recognized short-run neutrality.

8 Threats (2) Walrasian general equilibrium models treat money as if it were a private durable good. This is misleading.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.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.Inflation undermines mutual trust, resulting in a decline in mutually beneficial exchanges, leading to involuntary unemployment.

9 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.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.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.Unlike Keynes, Simmel sees discretionary policy as destructive. Like Keynes, he sees the monetary economy as fragile.