Philosophy of Money Georg Simmel (1907)

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

2. 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 utility-maximizing agents. Individualistic approach. • Highly pragmatic and positivistic. (Anticipates Friedman)

3. 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.

4. 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.

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.” • 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.

6. 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.

7. 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.

8. 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.

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. • 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.