Monetary Theory as a Prototype for a Theory of Civilization
Apr21
Money & Macro

Monetary Theory as a Prototype for a Theory of Civilization

Big questions can only be competently approached from a specialized research program. Here’s how I see my own research program – monetary theory – informing a broader theory of civilization.

Coordination and Extended Cognition

The most obvious relevance of monetary economics to a theory of civilization is the coordinating potential of the price system. It’s easy to take money for granted in microeconomics, since most economic tools were specifically designed to do so, with a functional price system in the background. But as ethnographic history makes clear, the coordination potential of a literate and monetized society (the two are, in fact, inextricable1) vastly outstrips that of premonetary and illiterate societies. Indeed, some advance in the ability to offload accounting out of the brain into ledgers, books, and media of exchange, precipitated each epochal advance in human organization. (And by the same token, each epochal regress – for example the collapse of the Roman Empire – was accompanied by declines in literacy and monetization).

And in terms of maintaining an industrial society, organization is at least as important as technological knowledge. As Leonard Read so artfully described, manufacturing even something as rudimentary as a pencil requires a great deal of coordination. Its four inputs – wood, graphite, metal, and rubber – are available in predictable quantities, qualities, and locations. This is not overseen by a director of pencil manufacturing; indeed by the time the materials get to the firm whose name is stamped on the final product, the bulk of the problem has already been solved. The firm crucially depends on it having already been solved – mostly through the price system and without conscious direction. The supply chains are so complex that the pencil almost certainly could not be manufactured economically without money prices to encapsulate global conditions of supply and demand into manipulable quantitative symbols. How much more will this be true of something technologically complex like a smartphone? All the technological blueprints in the world matter not a whit without the global supply chains, coordinated through money prices, that bring resources together in an economical manner. If civilization is defined as a level of human organizational complexity, money is absolutely essential for its maintenance.

The Institutional Preconditions of Liberty

Economic organization matters for more than just standards of living, as if there’s a state of Rousseauian natural liberty we could return to – poor, but free. In fact, economic organization depends on predictability. The liberty we take for granted today in Western civilizations is compatible with the predictability necessary for a fine division of labor only because of monetary exchange.

When an economic community first begins to specialize, you need to know whom you can go to in order to get the necessities you’re no longer providing for yourself. For this reason, pre-monetary social cooperation is only sustainable at the cost of a good deal of subjugation; forcing people into occupations – mostly on the basis of heredity – that they might not otherwise like to do. The community has a vital interest in the stability of occupations. If Joe stops farming cabbage, well where are we going to get cabbage from? So Joe, like his father and grandfather before him, is locked for life into farming cabbage. Knut, like his father and grandfather before him, is raised as a blacksmith. The alternative is not liberty; the alternative is no specialization at all: everyone doing subsistence farming.

Now enter money. By offloading accounting into some reified and quantifiable balance, by expressing purchasing power as wants much more clearly and directly as compared to premonetary credit, money supports a highly anonymous economic organization. Because there exists something that everyone will accept in exchange, entrepreneurial opportunities are much more easily discovered, and specialization can proceed in step with opportunity. The community now no longer has a controlling interest in Joe being the guy who farms cabbage; we can count on there being someone to farm cabbage, so long as there are enough people willing to pay for it. Joe, for his part, can feel free to start a bakery instead, or work a desk job, or do something that makes him happy and enables him to provide for his own needs. None of this would be possible without the ability to wield reified purchasing power as money. Without money, there can be no choice in occupation, no social mobility, no liberty.

And a functional money economy isn’t something you can just drop into place. It requires a culture supportive of…

Credible Commitment to Arbitrary Absolutes

If the previous points have seemed like a rather shallow dive into monetary theory, the nitty-gritty becomes very useful at this point – if not the most important point of the three, then perhaps the most urgent.

Kydland and Prescott’s paper on time-inconsistency was rightly recognized with a Nobel Prize in 2004 for its significance to monetary policy. A central bank with the best possible assumptions – perfect omniscience, effectiveness, and benevolence – still fails to generate optimal policy. Because it optimizes its behavior at each point in time – and it’s important to note that it does so perfectly, by assumption – it fails to optimize over time.

How does one solve the time-inconsistency problem? One has to pre-commit to an arbitrary rule – arbitrary in the sense that there’s no fundamental justification for the rule to be this rather than that. An inflation target, for example. Which, of course, prevents it from doing many things in the short run that might make things better. And this is exactly the point!

The commitment must also be credible: things improve only to the extent that people believe the promise. And a commitment must be costly in order to be credible; it has to hurt to break it. You’ve got to put chili pepper on your fingernails to break the habit of biting them. A non-credible promise is worse than no promise at all – a theme you also see in the literature on currency crises.

The paper also has hugely important implications for moral philosophy. Time inconsistency problems are everywhere. Smoking. Dieting. Capital investment. Delayed gratification of any sort. You’re playing a prisoner’s dilemma against your future self, and the only way out is to commit to a rule.

The fundamental arbitrariness of the rule is why it’s a prisoner’s dilemma. If you’ve committed to a gold standard, why not silver? Or why not save the resource costs entirely and go fiat? If you’ve committed to a 1% inflation target, what’s so special about 1%? Wouldn’t it be better if we had the flexibility to go to 2% or 3% if necessary?

One can, of course, do this to any social norm. The gold standard is a social construct. The rule of law is a social construct. Gender roles are a social construct. These norms (patterns of behavior) are arbitrary in the sense that they may as well be something else. But this fact does not mean we can change them to anything we like. Norms are cooperative strategies to prisoner’s dilemmas. Their purpose is coordination, and if their legitimacy is undermined, defection is the rational strategy. In order to sustain cooperation, such norms must, for practical purposes, be perceived as absolute.2

The only reliable legitimator of social norms so far has been mythology – i.e. an apparent grounding of the norm in the nature of things. Milton Friedman pointed out that the gold standard depended on a mythology of gold. Fixed exchange rate regimes today, by contrast, are based on practical interest rather than a “mythology of dollars”, and are to that extent less credible, and less effective.

Social cooperation appears similarly to depend on mythology in the last resort. Like a fixed exchange rate regime, it can be sustained for a while on the basis of self-interest or habit in good times; but – as recent rumblings from the Left portend – without a justification in the nature of things, self-interest eventually dictates defection from the prisoner’s dilemma. The coordination falls apart. In the three cases mentioned so far – fixed exchange rates, the rule of law, and gender roles – defection entails, respectively, currency collapse, police statism, and demographic collapse.

Conclusion

None of this, of course, is meant to suggest a mercenary interest in monetary economics. It is, and must be, interesting for its own sake3 in order to serve as a credible basis for a theory of civilization. But there is danger in the opposite as well: the shoehorning of a theory of civilization into a mundane research program without adequate tools to support it. As the saying goes, “When all you’ve got is a hammer, everything looks like a nail.”

These three parallels are an attempt to establish the adequacy of monetary economics to the task – at least that it has enough tools to form a credible foundation for a theory of civilization. Because the rise of the money economy was the impetus for the development of the tools of economics, and because monetization was the original impetus toward quantitative human reasoning, monetary economics is rich with well-developed tools and concepts, and extensively studied examples.

An ideal starting point if ever there was one.

Footnotes

  1. The very first recorded instance of writing was in fact the record of a monetary debt. Money and literacy were developed in tandem for accounting purposes, and each is rather necessary for the other.
  2. The ability to credibly commit on the basis of a sincere mythology is why I’ve argued that constitutional conservatism is the closest thing to a prosocial mass ideology in the U.S.; maybe even in the world. Libertarianism, whatever else it may be, is not (at least yet) a mass ideology.
  3. As I hope my other work on the subject demonstrates

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Edward Prescott, Finn Kydland

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Hi, I'm C. Harwick, an economics PhD candidate in Virginia with an interest in monetary theory, institutional evolution, and folk music.

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