There are two diametrically opposed methods in social science, and only one can be correct. The first, which is common, is to look upon society as a whole and then investigate the commands issued to it by The State. This is the method of central planners, and it is included in our school and college textbooks as “Indian economics”. In this approach, society is inert. Only the commands matter. Social scientists study these commands and, at best, come up with better five-year Plans.
The other approach, first enunciated by the great Viennese classical liberal economist Carl Menger in 1883, has nothing to do with commands and command structures. On the contrary, it finds something mysterious and worth investigating in human society precisely because there is so much that society accomplishes on its own, without any commands. The key question, then, in Menger’s own words, is this: “How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a ‘common will’ directed towards their establishment?” This quote is from his Investigations Into the Method of the Social Sciences, With Special Reference to Economics.
For example, languages have evolved without commands from on high. Not so long ago, “hardware” was hammer and nails and “software” did not exist. How did the word “software” come about? How is it that year after year compilers of English dictionaries are adding more and more words to the list, all of which have “gained currency” without any commands from 10 Downing Street? There are mysterious forces at work within human society, and it is these that need to be investigated by social scientists, according to the Mengerian view. If only commands and command structures mattered, there is nothing to investigate. Society is lifeless and must receive all its impulses from its rulers.
What about money? Is it the creation of kings and emperors from on high, or has money emerged spontaneously from within society itself? Did cowrie shells “gain currency” in the markets of ancient India just as words do in language? Or did some wise man think it up? It was again Menger who solved this mystery. In his Principles of Economics (1871), which established him as one of the founders of the “marginal revolution”, Menger provided us with a theory of the origin of money.
In brief, Menger began by looking at the basic problem with barter—the “double coincidence of wants”. If you have fish and want potatoes, you must find someone who has potatoes and wants fish. If the man with potatoes wants chicken, no deal. To overcome this problem, the mind of the trading human being resorted to “indirect trade”. The central idea was to find the one commodity in the market that had the highest saleability—and exchange one’s goods for this commodity. Once this sellable commodity has been obtained, all that requires to be done is offer this same commodity to the person who is selling what you want. Thus, in the markets of ancient India, the fisherman exchanged his fish for cowries, and then obtained whatever he wanted in exchange for those cowries. No king, no wise man, thought of money. The idea emerged spontaneously from the minds of trading men. This is how cigarettes emerged as money in Nazi concentration camps. In my boarding school, we were all little boys untrained in economics and used marbles as money. Different kinds of marbles had different values.
Menger’s theory of the origin of money tells us that The State has no role to play in the supply of money. If society is left alone, money will emerge spontaneously out of trade. All that The State has to do is to punish fraud. Menger, it must be emphasized, was no anarchist. He was a bureaucrat in the Hapsburg administration and a true-blue classical liberal. He chaired a committee that advised the government on the gold standard. It is surely no coincidence that the word “dollar” comes from a pure gold coin issued by the Hapsburgs, the thaler, which spontaneously emerged as the most popular coin in the early days of the US.
All this was well before John Maynard Keynes. The mischief that the Keynesians accomplished with their theories is precisely this: They made money a creature of The State. They created “macroeconomics” as a study of the commands and manipulations of central bankers from on high. Money was no longer what people accepted in exchange; on the contrary, it became a State subject. And the Keynesians justified this with their “aggregative theories”. Instead of looking at the minds of trading men, the method of individualism, Keynesians invented the fictitious measures of “aggregate demand” and “aggregate supply”. Thus, Keynesian macroeconomics is not very different from Indian economics: Both study the plans and commands of centralized government authorities. Neither provide any conception or understanding of economic laws and principles. And this is precisely why both have failed.
To clear this mess, we must get The State out of education. As Frederic Bastiat, a classical liberal, wrote in his manifesto of 1842: “If you want to have theories, systems, methods, principles, textbooks and teachers forced on you by the government, that is up to you; but do not expect me to sign, in your name, such a shameful abdication of your rights.” He added: “The monopoly of teaching cannot reasonably be entrusted to any but an authority recognized as infallible. Otherwise, there is an unlimited risk that error be uniformly taught to the people as a whole.” So let us be optimistic. There is much we can achieve without The State.
Sauvik Chakraverti is an author and columnist. He blogs at sauvik-antidote.blogspot.com.Comments are welcome at firstname.lastname@example.org