The Emergence of Money in Commodity Exchange, or Money as Monopolist of the Ability to Buy

Abstract

Money's emergence in commodity exchange remains an unresolved issue within economic theory. Current general equilibrium models offer an explanation that rests on the economic advantages of a universally accepted means of exchange that is partly established through social custom. These models neither fully explain money's unique ability to buy, nor theorise the customary practices required for money's emergence. They are dominated by Menger's earlier analysis of money's emergence, which pays more attention to the social foundations of money but is still hampered by Austrian individualism. An alternative explanation is given here, drawing on Marx's theory of value but involving a thorough reworking of it. An analytical process is established through which money finally emerges as monopolist of the ability to buy. Particular social custom, whose determinants are consistent with the social underpinnings of commodity exchange, plays a vital role in money's emergence.

Acknowledgments

Thanks are due to Ben Fine, Makoto Itoh, Alfredo Saad-Filho, Stergios Skaperdas and Sedat Aybar for helpful comments on earlier drafts. All errors are the author's responsibility.

Notes

¹Ostroy & Starr (1990) give an excellent, if now dated, survey.

²Overlapping generations models should also be mentioned, which incorporate money along lines proposed by Samuelson (1958). They focus exclusively on money as store of value, rather than means of exchange (Wallace, 1980), therefore Clower's conjecture seems unrelated to them. However, quite apart from these models' disregard of money as means of exchange, they also leave unexplained money's ability to act as store of value (means of hoarding). Yet, the function of store of value cannot be separated from what money is, i.e. from its monopoly of the ability to buy. The need to confront Clower's conjecture directly is not obviated by simply ignoring means of exchange. A fuller discussion of the connections between money's functions can be found in Lapavitsas (2000).

³In contrast to ‘chartalist’ views that treat money as a social convention created by law and authority. It should be noted that Marx's analysis also stresses the spontaneous aspect of money's emergence, i.e. money as outcome of exchange relations rather than of state action. However, Marx's approach allows for systematic theoretical connections to be drawn between money and the state (Lapavitsas, 2003, ch. 6).

⁴In Iwai (1988) the same argument appears as the generally held belief that money will lower search costs. Validation of the belief occurs when money is actually used as means of exchange. This argument is sometimes given the appellation of ‘bootstrap’ theory.

⁵Sekine (1999) has also used an arrow in this connection. I must thank Stergios Skaperdas for independently arguing in favour of using an arrow, thus persuading me to use Sekine's formulation.

⁶This formal presentation of the expanded stage is different from Marx (1867, p. 154) who writes: ‘z commodity A = u commodity B or = v commodity C or = w commodity D or = x commodity E or = etc.’ The presentation in this article makes it easier to grasp the economic content of the expanded stage, especially the indeterminate character of the relative.

⁷For commodity value to become a social norm with foundations deeper than the market, conditions of production also have to be appropriate. Specifically, capitalist conditions must prevail, such that money profits are systematically generated in production and accrue in commodity markets, while workers obtain money income in the labour market. Commodity value then becomes a deeply based social norm, summed up as ‘abstract labour’ (Fine & Lapavitsas, 2000). Under such conditions, money has its own value as abstract labour, which does not impinge upon its monopolistic ability to buy, but creates complications regarding the prices at which commodities are bought (see Lapavitsas, 2000).

⁸The asymmetrical relationship between money and commodities, and its connection to the asymmetrical relationship between commodity owners in the accidental form of value, is a hallmark of the Japanese Marxist Uno tradition (Itoh, 1976; Sekine, 1999; see also Sekine, 1997). This approach of the Uno school has broadly informed the analysis in this paper.

⁹There is similarity here with Polanyi et al.'s (1957) ‘particular’ and general money, but it is more apparent than real. For Polanyi, ‘particular’ money has a limited purchasing range because it belongs to a non-capitalist society, whereas the money of capitalism is general and has limitless ability to buy. However, the universal equivalent analysed here could very well exist in non-capitalist societies. The partial monies that arise as a result of custom are only intermediate steps in the monopolisation of buying ability and nothing else.