CEA Conference 2007 Heiner Ganßmann

Heiner Ganßmann

Money—the symbol and the game.

On sociological and economic theories of money.

Introduction

After Marx, Simmel and Weber sociologists did not contribute much to the theory of money for a long time. Post-classical contributions started with Talcott Parsons who introduced the idea of money as a ”symbolically generalized medium of communication” (Parsons 1967). This idea was taken up and modified in different ways by Habermas (1981) and Luhmann (1994). Their shared starting point was an analogy between language and money. A second analogy was used to introduce other “symbolically generalized media of communication”, first among them power. These media, one for each subsystem of society, were constructed in analogy to money.

Both analogies are somewhat misleading. Money has properties reaching beyond language. And other media, like power, do not share crucial properties of money (Ganßmann 1988, 1996). In abstracting from the differences between objects, institutions, social relations and concepts by lumping together money, power, influence, love, truth and more, in Luhmann´s case, or money and power in Habermas´ emphasis on the system/life-world distinction, the idea of symbolically generalized media of communication became too fuzzy to be useful. Nonetheless, placing money in the context of communication throws some new light on traditional problems of the theory of money. This may be useful especially given the continuing failure of economics to solve some self-imposed puzzles in the explanation of money.

My objective in what follows is to clarify the relationship between language and money, the role and functions of monetary objects as symbols in communication, and the ways in which the use of money structures social relations. Sociological views of money will be contrasted to traditional economic views with the hope that the contrast is enlightening for both sides. The general idea underlying my argument is that money is a social fact and as such a social construction. This does not sound like much of an insight. However, to fully recognize and articulate the specificity of money as a social fact is quite an intricate undertaking. One important issue is to understand the particular objectivity of money. It leads agents to behave vis-à-vis money as if it were given like a natural fact.

Why accept money?

A useful standard opening for discussing money is Menger´s old question: Why is "each economic agent .. ready, even eager to trade his goods intended for exchange against small disks of metal appearing to be useless, or against notes representing the latter"? For Menger, the fact that agents are willing to accept and hold intrinsically useless objects as money was something "which so contradicts the common run of things that we should not be amazed when it is described... as being ´mysterious´" (Menger 1892: 3[1]) The puzzle has remained. ”Who would want to exchange something useful in itself for something useless in itself?“ Shackle (1974: 4) asked almost a hundred years after Menger.

Explanations offered for the ready acceptance and holding of useless, valueless objects serving as money are not very satisfactory. Traditionally, they come in two groups: In the first, the phenomenon is described as circular. Everybody accepts money because everybody expects that everybody else will accept it.[2] In the second, money is accepted because it symbolizes something acceptable, namely, goods or their value or their utility.[3] The symbol represents, or stands for, other objects. However, when everybody acts as if the symbol was the real thing, some kind of projection must be taking place. Why and how does this happen?

To defend the first group, one can concede that social life may in effect be permeated by circular phenomena, like imitative behavior: I do something because you do something that seems to promise success. However, homo oeconomicus is assumed to be a rational individual. For a rational agent to accept fiat money, the expectation that others will accept it in turn, may be a necessary, but certainly is not a sufficient condition. There must be some individual gain in its use, and the gain cannot merely consist in the near certainty that you can get rid of it again without loss. In short, it does not seem rational to do something simply because everybody else is doing it[4], even though rewards may justify such actions post festum.

For the second group, the explanation of the nature and role of symbols becomes the main problem. Normally, symbols are seen as representations. In the case of money, the reasoning runs roughly as follows: There are useful things, goods on the one hand, and money representing these useful things, on the other. Manipulating the symbol is motivated by the fact that it provides for some kind of leverage in the world of "real" resources, of goods and services. But it remains puzzling why rational agents should go for symbols if they can have the real thing. One answer to this problem has been to point out some social advantages of using symbols (they are cheaper, safer, help save transaction costs, etc.). However, describing social advantages (whether in terms of "functions" or not) does not help in the world of methodological individualism: One has to show why individual agents would use symbols prior to assuming their social benefits and acceptance. This involves an explanatory difficulty that brings us right back to the circularity issue. Maybe it cannot be avoided because circularity is a general characteristic of social facts?

To discuss this and other issues raised by traditional strategies of explaining money, I will first introduce the philosophical approach of John Searle to the understanding of language, social facts and institutions. It is convenient that Searle frequently refers to money as an example of a social institution (Searle 1995: 37-53). After presenting Searle´s argument, I will relate it to economic and sociological concepts of money, returning to the questions concerning money as a symbolically generalized medium of communication.

Searle on social facts, institutions, and money.

Social facts - as opposed to ”crude facts“ like naturally given physical objects - exist only because there are agents with intentions. They create social facts by acting in a concerted fashion. For coordination they do not necessarily have to use language. But the emergence of one class of social facts, namely institutions, requires agents who can speak and act. To describe the general pattern in which institutions are built Searle uses the formula: X counts as Y in C. In a simple case, X will be a physical object, say, a piece of wood and a piece of metal stuck together. It is assigned a function Y by an agent to serve as a hammer. The assignment of a function has a normative dimension: It implies rules of how to use X so that it can count as Y. The assignment can be just an individual affair, or it can be performed by the members of a group in a social context C. If the function is assigned collectively it will imply shared rules regarding behavior towards the object. Rules can regulate a behavior that exists without the rule, like driving an automobile. It can be done without a rule that you should drive on the right side of the road. The interesting rules, Searle calls them “constitutive rules”, are those which regulate a behavior that would not exist without the rules. A football game is an example: without rules stating the objective and the legitimate moves of football, the game would not exist. If all players stick to the rules and play, they create the game as a social fact. The interesting property of such social facts is that they are dependent on agents who must behave so that they confirm them as facts. The objectivity of social facts rests on such a circular structure. They are generated by actions while at the same time they constrain, channel and regulate actions. How do these general ideas apply to money?

* Objects serve as money only if agents attribute to them one or more functions. Functions in general are observer-dependent. One can only say that something has a function if one also refers to observing agents. To attribute a function involves a reference to norms. Norms allow us to answer questions like: Has the function been performed? For example: Has a contract been fulfilled?) Such norms (implicitly or explicitly) serve to determine the states of systems with respect to which functions are distinguished and counted as fulfilled or not fulfilled.

* Money only appears in a frame of reference in which several agents share convictions, intentions, and needs. These interacting agents must be convinced that certain pieces of metal or paper are money; otherwise these objects cannot function as money. That agents share this conviction is a necessary, but not a sufficient condition for an object to function as money.

* Money only exists if the agents using money follow rules. These rules do not govern a type of behavior that would exist without the use of money (something often assumed when money is derived in a barter setting). Rather, the rules of using money are constitutive of money. The rules have the form: "X counts as Y in context C". (Or: This piece of paper counts as a means of payment in transaction T between Ai and Aj in Euroland)

* Rules supporting social facts can be understood like the rules of a game. Interrelated actions governed by rules form systems. Specific action systems (like a stock exchange or a basketball game) can be distinguished from their environment by patterns of rule-governed behavior. They can be understood only by understanding these rules, not just by observing them as sequences of physical events. Participants must broadly follow these rules; otherwise the game does not take place. Rules define rights and obligations, desirable or acceptable moves in the game. That participants have to be able to act according to the relevant rules does not imply - as would be the case in a game of chess - that they are capable to state these rules explicitly. Rather, they can follow rules without that capability – as speakers obey the rules of grammar. Rule violations are sanctioned in various ways. Elaborate rule systems feature mechanisms and institutions that help settle disputes about the rules and their meaning.

* Originally, objects - like pieces of precious metal - were selected to serve as money because they had physical properties convenient for the function(s) they served. However, in contrast to social objects like tools, say a hammer, whose functioning depends on a set of physical properties, learning by doing revealed that the functions of money can be performed by using a whole range of physical objects[5]. Thus, the objects originally serving as money can be replaced, as when paper replaces gold or silver, since it is not the nature of the objects but conformity to the rules of the money game which makes money possible. To play the game, the objects serving as money must be distinguishable from non-money objects. Their repeated use supports expectations about their continued use. They may then also have a signaling function—or serve as “status indicators”-- indicating what game is being played.

* Due to frequent repetition of the game, the collective attribution of a function to an object can become completely independent of the object's specific properties as a thing. However, this is not to say that the functions of money can be performed without a carrier object[6]. A spoken sentence can be a promise and the promise may oblige one agent to perform a service for another agent in the future, but the structure of claim and fulfillment alone does not turn a promise into money. If the promise is written on a piece of paper: ”I owe you...” and can be used by the recipient to settle a debt he has with a third agent, the piece of paper circulating in this way can be considered as a rudimentary form of credit money. The collective attribution has the simple form of "X counts as Y" (this piece of paper counts as money), but a more elaborate form is hiding behind it: "This object (piece of paper with a written and signed statement) counts as something which has this status (IOU) and, therefore, this function, namely to serve as Y (money) in context C". Until a sentence like: "This note is legal tender in State S" is elaborately printed on a piece of paper and all agents play their game as if this were the case and confirm their practice by continuously performing it, a lot of social construction must have taken place. Once established, however, the game rests in itself, notwithstanding its occasional manifest vulnerability, because it is advantageous for each participant to use money as long as the others are using it, too.

The main risks involved in the use of money are forgery and inflation. Most users of money want to protect themselves against these risks and this becomes a major motive driving technical and institutional innovations.

* When we say "money", the word is a summary expression for objects serving as means of exchange, stores of value, means of payment, measures of value, etc. Thus, the word "money" refers to a family of functions – sometimes performed by different, sometimes by the same objects. In this sense, the word „money“ marks the node in a whole network of practices, the practices of owning, buying, selling, earning, paying for services, paying off debts, etc." (Searle 1995: 52) “Money is a network phenomenon.” (Shubik I:142)

* To repeat, a physical object becomes money only if agents treat it as money. But not all agents are equal. Under modern conditions, a central bank will be an agent that encourages other agents to treat a specific object as money. It turns an object into legal tender by declaring it to be legal tender. Insofar as the agents accept this declaration and play their game by using this (and not some other) object as money, it will function as legal tender. Its continued acceptance will depend on whether the central bank itself conforms to certain rules.