Money Is a Social Contract: A Positive View

Both monetary theory and social contract theory consider a hypothetical situation (a model) in which people in a society come together and collectively agree on some social institution. I have argued that both social contract theorists and monetary theorists use these hypotheticals to draw normative conclusions about what types of institutions are preferable. However, part of monetary theory is also concerned with the positive (i.e., not normative) question “Where does money come from?” In a similar way, part of social contract theory is concerned with the positive question “Where does the state come from?”

In both cases, economists and philosophers engage in a strange form of positive analysis. The reasoning is not what most people think of when they think of positive science. The economists and philosophers are not doing historical work about how money emerged or about how political groups emerged. Instead, when they ask, “Where does X come from?”, they mean, “What are the underlying forces that gave rise to X?” That is a positive question with positive answers. It does not depend on what the economist or philosopher considers good.

While it may not be the standard way to view social contract theory, Gordon Tullock viewed his classic The Calculus of Consent, the genesis of social contract theory within economics, as positive economics. This is in contrast to how James Buchanan viewed the same project, as discussed by Brian Kogelmann. For Tullock, The Calculus of Consent was part of the “theory of candidates and parties.” By considering a hypothetical situation in which people have to come to some agreement, Tullock gained insight into how actual candidates and parties behave. It is not necessary that no such hypothetical situation existed or will ever exist. The thought experiment isolates the fundamental forces that give rise to political behavior.

The classic works on the origins of money use the same tool of analysis. Consider Carl Menger’s famous paper “On the Origins of Money.” Menger generates the simplest model possible to illustrate the fundamental forces that give rise to money, starting with the problem of the double coincidence of wants:

Even in the relatively simple and so often recurring case, where an economic unit, A, requires a commodity possessed by B, and B requires one possessed by C, while C wants one that is owned by A — even here, under a rule of mere barter, the exchange of the goods in question would as a rule be of necessity left undone.

I would bet that Menger did not think that in some historic past three people — A, B, and C — existed and ran into this particular situation and invented money. Even if Menger did think that, other people should not. The model should not be used to make historical claims. It can make positive claims about how the world works. Modern monetary theory uses more-complex models to learn about the same sorts of mechanisms.

I keep calling this move strange, and it is strange to non-economists. It does not fall into simple conceptions of doing science and has led to some serious confusion over what Menger and Adam Smith before him were actually arguing. To avoid such pitfalls, economists need to be precise about their form of reasoning and non-economists need to understand how economists use models for different purposes.

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