Pragmatic Pluralism 12: Money

This chapter provides a map through the complex jungle of economic theories. There are many different theoretical approaches, and each aspect of the economy has been analysed by a number of different ones. However, it is neither feasible nor productive for students to engage with every possible angle for every topic. Hence, the chapters on different topics, together with Building Block 8: Economic Theories, sets out an alternative approach: pragmatic pluralism. Rather than pursuing the extreme of either only focusing on one approach, or including every possible strand of thought for every topic, we propose a pragmatic middle ground: teaching a select number of approaches for each topic. In this way, it is possible to introduce students to the variety and diversity of economic thinking, whilst still having enough time and space to properly discuss each of the insights in detail with them.

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Money rules the world, or at least it often seems to. We all use it every day, so we often assume that we know it very well. But what is money in the first place? This seemingly easy question has triggered countless debates for many centuries. At the core of these debates is whether money is something purely technical and instrumental, or whether it fundamentally shapes, and is shaped, by social and power relationships. Another key insight is that cultural practices influenced how we see and use money.

Main opposing perspectives

■ Post-Keynesian economics: Credit theory of money

■ Austrian school: Commodity theory of money

Main complementary perspective

□ Cultural approach: Earmarking money

Additional perspectives and insights

+ Historical school: State theory of money

The two main contrasting views on money are the credit and commodity theories. The former sees money as a fundamentally social arrangement of debt and credit, while the latter views money as a purely instrumental object that can act as a means of exchange. 

The commodity view, also called metallism, was first proposed by Aristotle and is further developed by classical, Austrian and neoclassical economists. The commodity approach argues that money spontaneously originated to replace barter as it is more efficient to use money as a medium of exchange. In this perspective, money is neutral and has no effect on the real economy (at least in the long run). This idea of seeing money as a veil is often referred to as the classical dichotomy.

The credit view, first put forward by Plato and further developed by post-Keynesian, as well as Schumpeterian, economists, instead views the real and monetary economy as fundamentally interconnected, also in the long run. Money in this perspective is understood to have originated from social obligations in the form of debt and credit. Most recent historical and anthropological evidence tends to support this view of the origins of money.

The cultural approach investigates how historically situated understandings and norms related to money evolve and influence its role in society. In this perspective, money is not something impersonal, homogenous, objective or purely quantitative. In fact, money has highly personal, heterogenous and subjective meanings for people. Cultural practices, rules and habits around money are therefore of great importance. Official money may be legally or financially entirely uniform, but people will create special monies to mark off different activities and social relations. This practice is called earmarking as people designate certain monies for particular purposes. 

Within behavioural economics, this practice is referred to as mental accounting and is often understood as irrational behaviour. They argue earmarking money is irrational because it does not follow the rational man, as described by neoclassical economics, which pools all money. From this perspective, the practice of earmarking money thus leads to inconsistent choices because of different monies, or mental accounts. 

There is also another theory of money, which originates from the historical school, which sees money as being created and controlled by governments who can issue their currency and require citizens to pay taxes in them. This theory is known by various names, such as the state theory of money, the theory of tax-driven money, and chartalism. The credit and state theory overlap as they both see money as a social claim to abstract value. The credit theory, however, focuses more on the role of finance, while state theory pays more attention to the role of government. 

The two perspectives are also often combined as, for example, recently has been done by modern monetary theorists. The debate between the commodity view on the one hand, and credit and state views on the other, has returned many times in history, such as during the Methodenstreit between Austrian and historical economists at the end of the 19th century, between neoclassical and Keynesian economists in the 1930s, and more recently between (monetarist) neoclassical and modern monetary economists.

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