A REFUTATION OF MENGER’S THEORY OF THE ORIGIN OF MONEY (abridged)

To view the actual 20 page paper text, click here.

Here below is a two page summary plus communication with the Austrian School

A challenge to the Austrian School of Economics and the Ludwig Von Mises Institute. Of much more general importance than it sounds, obeisance is universally paid to Menger’s 19th century re-incarnation of John Law’s theory of money, by present day Austrian economists. Menger’s origin theory is also at the base (often explicitly) of much so-called libertarian thinking and writing today. For example Robert Nozick uses it to launch his book Anarchy, State , And Utopia, (p.18) one of the Libertarian’s “bibles”.

This paper most likely deals a “death blow” to this core thesis of the Austrian School, as formulated by Carl Menger, the school’s founder. In effect the Austrian’s are left without a viable theory of money. It would be difficult to imagine that one could be provided by Von Mises confused and self contradictory book THE THEORY OF MONEY AND CREDIT.The understandable reluctance of “Austrian gatekeepers” to address this issue are documented below.

SYNOPSIS:
The paper challenges Menger on three grounds:

METHODOLOGICAL GROUNDS:
Though it is generally assumed that Menger’s theory is at least in part derived from historical evidence, the paper demonstrates that its derivation is entirely theoretical, by showing that all the historically based evidence cited by Menger, is 180 degrees counter to his theory. The paper points out the inappropriateness of attempting to divine an historical event or process with only deductive logic.

RATIONAL GROUNDS:
The paper points out that even within the framework of Menger’s scheme, there are two fatal flaws. First the circularity of his reasoning in determining his causes of liquidity, which arises from his use of the “development of the market and of speculation in a commodity” as a cause of liquidity, when in fact it is a definition of liquidity and even Menger uses it as such. The paper explains the crucial difference. This is not quite an example of what has been called “Weiser’s Circle”. Second, the paper points out that within Menger’s scheme, it is not liquidity, but volatility (or lack of it) which is much more important.

FACTUAL GROUNDS:
The paper shows that some of Menger’s closely held general views of the stability of gold and silver and their universal use as money, are simply false. In addition the existence of the millennia long dichotomy in the gold-silver ratio between east and west, which Menger seems to be unaware of, appears sufficient to doom his theory.The paper presents some of the factual evidence gathered by William Ridgeway, in the ORIGIN OF METALLIC WEIGHTS AND STANDARDS; by A.H. Quiggin in A SURVEY OF PRIMITIVE MONEY; by Paul Einzig in PRIMITIVE MONEY; and by Bernard Laum in HEILEGES GELD; all as an indication that an institutional origin of money, whether religious or social, is much more likely to have occurred than Menger’s assumed market origin. (25 pages, footnoted, charts, a real barn-burner. Suggested donation $20 postpaid; students $10.)

CORRESPONDENCE WITH THE AUSTRIAN SCHOOL:
Attempts to bring this paper to the attention of members of the Austrian School, through their publication, were at first blocked and then ignored, as seen in the following copy of their reply and critique of the paper; and the answer to their critique, to which they have not responded. “Make the most of it” indeed! Lets see if Internet culture can end such academic stonewalling, and flush the Austrians from their ivory towers down at good ole Auburn University.

THEIR COVERING LETTER:
A normal note.

THEIR UNSIGNED CRITIQUE:
Comments on “A Challenge of Menger’s Origin of Money”
“The author seems to ignore economic theorizing in general and Austrian theorizing in particular. The author does not comprehend that Menger is using “essentialist” methodology to prescind from specific facts to arrive at a theory of history, in this case a theory of the origin of money. All of the author’s alleged empirical “refutations” of Menger are not refutations at all, and they have been largely known for a century; the fact that some primitive societies got stuck in barter, or that cattle has been used for money; are all well-known, and so what? The author does not seem to realize that money is a general medium of exchange, and a common denominator of prices, and that therefore any explanation of its origin requires an explanation of how such a general medium came about. Talk about a religious cult of gold explains nothing (except, perhaps, a part of the high non-monetary demand that gold has always enjoyed). For a summary of monetary history from a pro-gold standard perspective incorporating his alleged “refutations,” the author can look at J. Laurence Laughlin, Money, Credit, and Prices, (vol.1, chap. 1, 1931).

Finally, of course, the author seems to have no knowledge whatever of the pons asinorum (the “bridge of asses”) of monetary theory; Mises regression theorem of 1912, in which Mises showed that, logically, no money could have arisen in any way other than the Menger scenario. If this be “a priori history,” then make the most of it! It is inherent in the logic of the situation, and the logic of money as containing an historical component of demand a value.(sic)I am afraid that I am not able to recommend this article for publication in the RAE.

MY LETTER CHALLENGING THEIR CRITIQUE AND REQUESTING ANOTHER READER:
I responded with the following letter, which has remained unanswered (to Ocotber,96):
Mrs. J. T.
Managing Editor, Review of Austrian Economics
Ludwig Von Mises Institute, Auburn University
Auburn, Alabama, 36849
Dec. 30, 1994

RE: my refutation of Menger’s Origin of Money theoryDear Mrs. Thommesen,Thanks for your letter of November 10, which I am a bit late in answering, as some writing assignments came up. I must take exception to the brief comments on the paper which were included. Its as though the Commentor didn’t read my paper very carefully, or ignored much of it. I respectfully request that you obtain a second opinion, for the following reasons:

First I can assure you that the paper is much more serious than the comments suggest. Looking at the comments sentence by sentence:

Sentence #1 – I’m not ignoring Austrian theory. My whole paper carefully considers Menger’s theory!

Sentence # 2 – My paper clearly makes the point that Menger does not identify any facts, from which he has abstracted his theory. There is no mention of times and/or places, whatsoever. What are the facts Commentor refers to? He has missed one of the papers main points.

Sentences #3 – #5 – Commmentor is not doing his job here. He is ignoring the 130 grain institutional convention on coinage. One of at least three ancient standard systems. Furthermore, the empirical refutation is only one part of the case against Menger. Commentor has completely ignored the logical refutation of Menger’s theory contained in the paper – Menger’s definitional circularity – as well as the clear demonstration that volatility, not liquidity, is the real feature to look for, within Menger’s logical scheme.Sentence #6 – Regarding Laughlin’s “pro-gold standard perspective”, that is a curious description. I’m familiar with Laughlin’s historical narrative from his 1911, PRINCIPLES OF MONEY. It doesn’t refute or challenge what I wrote on Menger. However out of courtesy to Commentor, I’ll check out the 1931 version, soon.

The bigger picture here though is that if Laughlin was aware of some facts which disqualify Menger’s theory, Laughlin, and Commentor’s ignorance of the relevance of those facts, does not invalidate the power of those facts to refute Menger! For example the great dichotomy in the gold-silver ratio between east and west.Commentor should be made aware that Laughlin is not a very objective source on monetary science; his work invariably supports special monetary privileges for bankers. To his discredit, he was either unable, or unwilling to identify that the effect of bankers creating deposits was nearly the same as bankers printing notes, in the newly organized Federal Reserve System, which he helped to author, or thought he did. Another low point in Laughlin’s career can be found in his comments on U.S. Treasury notes, issued in 1812, upon the dissolution of the 1st Bank of the U.S.

Next, regarding Commentor’s reference to Von Mises “Bridge of Asses”. Isn’t this the same argument which Benjamin Anderson (see THE VALUE OF MONEY, P. 89, Publisher R. Smith, 1936 edition) considered and rejected as inadequate, as a means out of Weiser’s “Austrian circle” on the value of money, even before Mises wrote his THEORY OF MONEY AND CREDIT in 1912? Anderson’s point was that “whats necessary is not a temporal regressus…but rather a logical analysis of existing psychic forces.” I think there is a reason why that won’t work for Austrian monetary theory, but that’s another matter.The point however is that my paper is addressed to Menger’s theory. Is Commentor saying that Menger’s “origin” can’t stand on its own merit and must be propped up by von Mises?

Commentor’s statement that “No money could have arisen in any way other than the Menger scenario” is an affront to science, and to consciousness everywhere, and should be identified as such. Economics will not likely be advanced by stubborn shouting. The facts must be examined in an open and logical manner.

Lastly, Commentor’s overdramatic assertion “If this be a’priori history then make the most of it” seems to say that its not whether Menger’s theory is accurate or not that matters, but whether there’s enough influence to put it over!

Before sending out my paper for publication, three people with advanced monetary knowledge read it. One an instructor of several years in monetary thought and history, at the graduate level. Another a professor of economics (Austrian) at a prestigious university; and the third a lifelong student and author of books on monetary history and theory. The first encouraged me to work toward publishing the paper. The second considered the volatility argument to be “good and interesting”, and the third wrote “This paper should be brought to the attention of scholars.” That’s why it was sent to you; but Commentor has dropped the ball, big time.

I request that you get a second opinion of the paper, and suggest that someone of Prof. Rothbard’s intelligence and maturity be asked to read it.

Sincerely Yours,
Stephen A. Zarlenga
(note: sadly, Prof. Rothbard died at about this time)

The full text of Menger’s theory of the origin of money can be found at

http://www.ecn.bris.ac.uk/het/menger/money.txt

Stephen Zarlenga’s refutation of Menger’s theory is available from
AMI, PO. Box 601, Valatie, NY, 12184
( $20 postpaid; students $10)

 

2 Responses to “A REFUTATION OF MENGER’S THEORY OF THE ORIGIN OF MONEY (abridged)”

  1. Daniel J Soria says:

    I am grateful for your paper, and it’s addressing the “holes” within the Austrian School’s economic mysticism.

  2. krdo says:

    Austrian school is full of it.. What is their all-knowing “market” anyway? it is but an equivalent of the mystical term “society” in contemporary marxism. They are in fact, two structurally identical theories, with different terms being used. And there has never existed such a thing as a strict separation between “public” and “private”, a cornerstone of all “liberal” theories. What they attempt to do is to derive all norms, morals, and culture from “the market”, i.e. to explain all of society and culture in economic terms, which is basically the same approach taken by marxism.

    As to the money and the origins there of, and its “inherent” value; Its value is whatever it is deemed to be.. which is both necessary and sufficient for its existence and functionality. And the only thing it represents, and ever has, and ever will, is time.

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