II. Macroeconomics and money

Money as a social institution: Its historical emergence and political implications


Money is often considered a valuable natural object that performs three functions: a means of payment, a unit of account, and a store of value.

A growing heterodox literature stresses the social nature of money, nonetheless, rather than its material composition or its functions. Despite this new attention to social dimensions, there are still differences in types of explanations. Some emphasize the different ways that money is used in different social contexts (Zelizer 1994). Others examine the composition of the money object historically (Davies 2013). Still others stress that money is a symbol of types of social relationships—credit and debt by Ingham (2004) and Graeber (2011); wage labor by Marx (1867/1967); and state debt by Lawson (2016) and Wray (2012). Some see money as a discrete object of individual private property, while others see it as “community relative” and subject to community design (Desan 2017; Lawson 2016).

Within mainstream economics, money is a veil that does not affect real relationships. By contrast, in heterodox economics, money is essential and alters the functioning of the economic system. In Keynesian and Marxian economics, for example, money changes the nature of the economy and its operations, affecting its stability.

This chapter reviews this recent heterodox literature and explores the implications of these issues. After reviewing key aspects of the social nature of money, the chapter briefly discusses the history of institutions of public credit in the modern liberal state. We explore the paradoxical experience of individual powerlessness in the face of an institution, the power of which depends on the acceptance by each individual. A holistic analysis of money is provided by the method of historical institutionalism, which considers key terms, such as money, the evolution of related institutions such as credit, and the associated expertise such as economics (Davis 2015a, 2017a, 2017b). Money is a symbol reinforced by the operation of key institutions, without which the public trust and operational practices would not be sustainable.

Money is social, political, and economic

Reviewing the heterodox literature on money, there are several key ways in which money is social.

  • 1 Conununity-relative. As discussed by Polanyi (1944), money is defined in a specific sovereign nation, as a symbol of that nation. The strength of the currency, in terms of purchasing power and creditworthiness, and the power of the sovereign are mutually constitutive.
  • 2 Rule-governed. The methods by which one can acquire money legally, and how it can be used, are subject to laws, rules, and practices (Deakin et al. 2017; Hodgson 2015). Similarly, certain contexts are inappropriate for monetary exchange (using cash to buy friendship) and certain types of objects (purchasing human organs like kidneys) (Kuttner 1996; Sandel 2012"1-"86; Satz 2010).
  • 3 Future-oriented. Money in the liberal state is based on collective anticipation of the future of the nation-state. The issue of public debt is based on anticipated future tax collections (Beckert 2015, 2016; Boldizzoni 2017; Davis 2015a, 2017b; Mitchell 2014). Credit based on the expected future repayment can then expand the capacity of the state, including military, and so help to assure the security of the state.
  • 4 Safe asset. Public debt has been the core asset of the financial system, since the late seventeenth century. Public debt is the “safe asset” in modern economies (Davis 2018; Gorton 2016).
  • 5 Constitutional. The safety of the public debt was based on constitutional compromises, such as the “King in Parliament” (North and Weingast 1989). That is, the monarch had no authority for taxation and expenditures without the consent of Parliament, after the “Glorious Revolution of 1688.”This principle, “no taxation without representation” became the revolutionary slogan of the U.S. War of Independence in 1776. The establishment of the national currency was assigned to Congress in the U.S. Constitution of 1787. Nations can declare a new currency, and nations themselves can be mortal, even as they project a perpetual future.
  • 6 Money as collective commitment. Money is based on collective commitments, by which its soundness is assured; expansion of scale allows for pooling of risk.The currency of a single individual would have no meaning, because it is only meaningful in exchange.There are network externalities, so a strong currency is used by many, which then reinforces the currency’s power. Money is issued by a community or corporate entity, because any human individual is mortal; modern financial markets are perpetual, requiring a corporate entity such as the state to recognize its exchange value over an infinite time horizon. The public designation of legal tender requires public recognition and conventional acceptance (Lawson 2016; Searle 2010;Wray 2012).
  • 7 Explanations of value. Money is often considered as composed of a valuable substance, and so is valuable itself (Lawson 2016). This forecloses the issue of the nature of value in a market economy, about which there is no consistent explanation in mainstream economics (the adding-up problem; economies of scale versus constant returns to scale; the capital controversy; happiness versus gross domestic product; utility versus labor theory of value—Foley 2006; Harcourt 1972; Poovey 1998; Sinha 2010).
  • 8 Semiotics of money. Money is meaningful to users, as an ineluctable part of its operations (Sewell 2005). As such, money can be considered a form of writing, a specific genre (Poovey 1998, 2008). There is a performative dimension to money, such that beliefs in its value influence others’ beliefs and help to make it valuable (Beckert 2015,2016).

These features have emerged historically and can be documented, in economic history and the history of economic thought. By contrast, mainstream economics is founded on abstract universal axioms based on the presumption of an eternal exogenous human nature. The mainstream approach defines money by its functions, leaving aside the human agents who actually perform these functions. This is a form of reification, where the social dimension is invisible (Davis 2017c).

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